There is a significant risk that multinationals and young, mobile South African tax residents could move to tax-friendly jurisdictions should the foreign employment income exemption be repealed as proposed, experts have warned.
“We will raise in our submissions [to Treasury] that this could be the final straw for some companies who would like to use South Africa as a gateway to Africa… the tax burden is just becoming so punitive that they would much rather move to Mauritius or other jurisdictions,” Erika de Villiers, head of tax policy at the South African Institute of Tax Professionals (Sait), says.
The hope is still that logic will prevail and that the exemption will not be repealed in its entirety, she adds.
In the February budget, National Treasury proposed that South African tax residents who work offshore for more than half the year and who paid no tax in these countries, would have to pay tax in South Africa.
In the Draft Taxation Laws Amendment Bill published in July, the proposal was broadened substantially.
“The original budget proposal would have caught people who work in places like Dubai where there is no income tax, whereas this proposal catches any South African [tax] resident who earns remuneration in any foreign jurisdiction anywhere in the world,” De Villiers says.
“So now it supposes that it doesn’t matter how much tax you pay in the other jurisdiction, there will be no exemption whatsoever,” she adds.
Cor Kraamwinkel, partner at PwC, says effectively this means that a South African tax resident working abroad for more than 183 days a year (of which 60 days were continuous) would in future be fully taxed in South Africa and would only be eligible for a tax credit to the extent that tax was paid offshore.
The proposed amendment will take effect on March 1 2019.
South Africans working abroad will only escape the proposed amendment if they are not tax residents in South Africa or deemed to be resident in a foreign country as a result of a double tax agreement.
National Treasury says the exemption was never intended to create situations where employment income was neither taxed in South Africa or in the foreign host country.
“It has come to government’s attention that the current exemption creates opportunities for double non-taxation in cases where the foreign host country does not impose income tax on the employment income or taxes on employment income are imposed at a significantly reduced rate,” it says.
It also believes that the exemption creates unequal tax treatment between South African residents employed by national, provincial or local government and individuals employed by the private sector. The former category of taxpayers does not qualify for the exemption.
De Villiers says a lot of multinational enterprises are headquartered in South Africa and expanding internationally – particularly into Africa – and send their employees to open up operations or work on projects in other jurisdictions. They could all be affected by the proposal. It could also affect people working overseas because they couldn’t find a job in South Africa.
Should the proposal be implemented in its current form, the administrative burden on tax compliant employers and employees will be significant.
Proving that a taxpayer suffered a tax in a foreign jurisdiction is incredibly onerous. Taxpayers on short-term assignments who already claim similar credits find that it can take two to three years to get the credit allowed. The credit system will have to be significantly streamlined before this proposal can be implemented. The proposal also does not address the cash flow issues arising from an employee being subject to PAYE on the same income in two jurisdictions, De Villiers adds.
She says there is a significant likelihood that affected individuals – particularly young, highly mobile professionals – would decide to emigrate. People weigh up whether they would have to pay a large once-off tax (exit charge) on the value of their assets (excluding immovable property).
For some people the additional tax burden may be so significant that they won’t have any choice but to emigrate, as they need a certain after-tax income to meet their financial obligations abroad, she says.
Kraamwinkel says the decision about emigration will be fact specific. Although individuals don’t pay income tax in a country like the UAE, the cost of living is significantly higher.
“There is a bracket of South Africans that simply won’t be able to afford their existing lifestyle offshore if they have to start paying tax in South Africa,” he says.
South African tax residents working in countries like the US, the Netherlands or Canada may however not be in a similar position because they would in theory be able to claim a full tax credit in South Africa.
Kraamwinkel advises taxpayers not to panic, and to carefully consider their tax residency position – both in terms of South African domestic law and the tax treaty, where applicable.
“You may be in the position where either you have already technically lost your South African tax residency or you are in a position where it may soon happen, which will then also alter the outcome, because if you are not a tax resident in South Africa, this provision cannot affect you.”