South Africa’s four large audit firms and tax and accounting industry institutes have made a joint submission to National Treasury, asking for a proper investigation into the impact of scrapping an existing income tax exemption on foreign income.
PwC, EY, KPMG and Deloitte, the South African Institute of Tax Professionals (Sait) and the Institute of Chartered Accountants (Saica), conclude that the intended scrapping of the tax exemption will increase the cost of employment, impact existing projects and affect the future competitiveness of South African labour.
Currently, South Africans working abroad for more than 183 days a year enjoy a tax exemption on the foreign employment income they earn, subject to certain conditions.
National Treasury announced in the February budget that the exemption “appears excessively generous” as the foreign income may benefit from double non-taxation.
Listen to the podcast: Treasury proposes the removal of the foreign-employment income exemption
Treasury has proposed that the exemption be adjusted so that foreign income will only be exempt from tax if it is subject to tax in the foreign country.
If not, South African income tax will apply to the foreign income.
This may place South Africans working abroad in a worse tax position as many countries’ personal income tax rates are lower than South Africa’s.
In the submission published on the Sait website, the contributors conclude that there will be an increased cost of employment for South African and international employers with South African tax resident employees working abroad.
Employers who offer their employees the opportunity to work abroad do so with the assurance that the employee will not be worse off in terms of their tax position.
If the income tax exemption is scrapped they will have to cover the tax cost to ensure the tax protection stays in place.
“Ultimately, it will be South African companies investing abroad that will suffer from this change. In addition, the individuals’ tax returns will become far more complex and costly to prepare, with amended returns for credit claims being required once foreign tax is paid in the host country.”
The submission concludes that there will be an increased administrative burden for employers to keep track of the tax affairs abroad and locally.
Furthermore, an individual claiming relief through the use of foreign tax credits (when tax has been paid in South Africa and the foreign country) can only do so when they submit their own tax return. Up until that point, the individual must still make payment of all taxes due in South Africa and the country they are working in.
“It is evident that a cash flow problem will occur where tax is due and payable on a monthly basis in the foreign country as well as to the South African Revenue Service (Sars).”
The refunds from these tax credit claims can take years to be paid, as Sars often insists on auditing refunds and verifying bank details in person, leaving the taxpayer (and ultimately the employer) out of pocket in the interim.
“The incentive for South Africans to remain within the South African tax net will be counteracted by the high cost for the individual and the affiliated employer,” the group says.
The submission warns that South Africans may decide to take the plunge of the exit charge when they decide to formally emigrate. Previously many South Africans took steps to remain tax resident in South Africa.
The reason for this was because ceasing to be a South African tax resident (exiting) meant that they would be taxed by Sars on the deemed disposal of their assets at market value. This is the so-called exit charge.
Erika de Villiers, head of tax policy at Sait, says following the proposed scrapping of the tax exemption, many expatriates who work in no tax or low tax jurisdictions will be weighing up their options.
“They might find that the South African tax saved on their foreign remuneration (once they are no longer SA tax residents) outweighs the exit charge. They might then take steps to break their South African tax residency by moving their families offshore.
Younger people in middle management might be more likely to sever ties with South Africa, and take the pain of the once-off exit charge in favour of greater income savings in the future.
“We are in particular concerned about the likely effect on the status of South Africa measured against other countries such as Mauritius as the preferred platform for regional expansion, and the direction that foreign investment would take in future,” the audit firms warn.
De Villiers says they are now awaiting the Draft Taxation Laws Amendment Bill (DTLAB) to see how Treasury proposes to amend the legislation.
The bill is expected to be published for public comment within the next month. The public consultation process will then start with opportunity for comment and to attend workshops convened by Treasury.
She says Sait as well as the other industry players will be making further submissions and presentations throughout the process.
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