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Expat tax could be ‘final straw’

Risk of multinationals, individuals exiting SA, experts warn.

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South African tax residents could move to tax-friendly jurisdictions should the foreign employment income exemption be repealed as proposed, experts have warned.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The hope is still that logic will prevail and that the exemption will not be repealed in its entirety, she adds.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.”

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Agree with this article, this will be a disaster. The principle of tax is that it is a contribution from citizens for services delivered. If one is not receiving services because one is living abroad, how much should one pay? Most countries recognise this. For example, when a purchase is made by a foreigner they can have the sales tax back on leaving.

If one is working abroad and one has dependants in SA using services in SA, a certain amount of tax would be acceptable. If one has no dependants in SA using no services, how much should one pay?

We cannot afford to drive away more skilled people.

I believe that SA has one of the most tax redistributive systems in the world. By that is meant that the people who pay the taxes get little back in terms of services themselves. The benefits go mainly to those who are unable to pay for services. I understand and accept that.

However, if the taxes are going into a bottomless pit and being siphoned off to corruption, who can accept that? Neither the ‘rich’or ‘poor’.

I believe that people are starting to realize the difference between a South African CITIZEN and a South African TAX RESIDENT. If, like me, you have lived outside of South Africa for many years and have minimal connection with the country, you will not be impacted by what is currently being proposed, i.e. you will NOT be taxed on the income you earn outside of South Africa. People, especially those in the Facebook groups in the UAE, have been concerned that their tax free income will be impacted. Unless you are a South Africa tax resident you will not be taxed on your income earned in the UAE. That’s my interpretation anyway. Bye from Abu Dhabi.

The test as applied by SARS is that if the individual has any intention of returning to reside in RSA, tax must be paid. Those having no ties with RSA, ie no dependants here an no assets are probably OK. But those who do have dependants and assets will be obliged to pay tax. Presently the regulations provide that no tax is payable on earnings offshore provided the individual is out of RSA for more than 183 days a year. The actual changes to this regulation will only be known in a month or so time. All that has been said thus far is that SARS wants to align South African residents working abroad(NOTE – not only citizens) taxation with residents working within RSA. As I understand it, anyone who has cut ties with RSA and has no intention to return would not be obliged to pay tax.

“As I understand it, anyone who has cut ties with RSA and has no intention to return would not be obliged to pay tax” — this is my exact understanding too. Seems I am in the clear then since I have no dependents, only one (vacant) 21Ha game farm and no intention of returning to South Africa (unfortunately). But I can see how others who are more closely linked to South Africa and will return there ‘after their wanderings’ (per the Tax Act) may have difficulty proving they are not South African tax residents.

@Charlesarnstad. Correct & in agreement. Summed it up nicely in a nutshell, as Residency/Non-residency rules is a complex topic.

Important that S’Africans that plan to make a foreign country their permanent residence, is to (also) motivate/prove to SARS that one’s permanent place of abode is abroad, without intention to return to SA. Also advised to cut ties with SA (business/affiliations/club memberships/sell SA property & vehicles) that will help to motivate in which country of residence your ‘vital interests’ are located.

this will impact the guys living in the UAE as they cannot mak that their permanent residence….you cannot emmigrate to the UAE, you are there as long as you have a job, no job no staying.

Yes, that may be true that you cannot stay in the UAE permanently without being sponsored by a local company (or even your own company registered in a Free Zone). But I suspect that this is NOT what the Tax Act is aiming at. I have lived in the UAE since July 2006 (and in the Middle East since September 1996) and regard it as my home and the country of residence of my ‘vital interests’ (as MichaelfromKlerksdorp mentioned earlier). Even though I would have to leave if I was not sponsored in the UAE I certainly have zero intention of returning to South Africa after my wanderings so I will definitely not be classified as a South African tax resident. Time will tell, however. Life is what happens when you are busy making other plans.

So we have to follow first-world countries legislation but have third-world regime?

Don’t equate SA with US or Aus

A technical article, proposing a logical and prudent approach to the proposals. But behind Treasury’s proposal is the general and ongoing focus on redistribution of a diminishing pool of resources, rather than economic expansion; systematically demonising and punishing the hardworking to no sustainable benefit of the downtrodden. A road that lead to economic implosion elsewhere and risks the same here, signs of which are already visible.

I think it is very unfair to compare South Africa with countries like the US or Australia. The latter has a much larger tax base. In South Africa, 3.3 million people pay 99% of personal income. Those have already been stretched to limits.

Countries like the US an Australia are also first world countries, whereas SA hovers over to fourth world status.

If government was to be using the R32 milliard and ever increasing – and yes, that id the correct metric system unit – lost through corruption and irregular expenditure, this money could be put to better use by investing in job creation and expand the tax base in that manner.

It will then not be neccessary to burden the soon to become expats with double taxation. It might find itself in the favourable postion to actually lower personal income tax and perhaps even Company tax altogether.

However, logic and being able to do the right things has for ever escaped the people in power.

As other comments have suggested – the impact seems to be overstated. Provided SARS is fully resourced up to handle all the requests for ’emigration’ for tax purposes and can execute those quickly I’m struggling to see the impact. Those affected will simply give up their tax residency. Sure they must liquidate their local non-property assets and pay CGT – but at some point they will pay CGT on those gains anyways. Even without this they are possibly better off paying the CGT now since CGT inclusion rates seem destined to only go upwards and if they split their disposals between this tax year and next year (with the change only planned for 1 March 2019) then they would need significant assets for this to have a big impact – particularly as their income in SA is probably nil in these two years – so their marginal rates are low. Many YOUNG professionals probably don’t even have enough assets that they have held for long enough for them to have gains that will exceed the exclusion rate plus the rate at which you start paying tax when spread over two years.

‘Those affected will simply give up their tax residency’

Simple hey?

Stuff their lifestyle, children, aged and sick parents, future costs, giving up being a South African boerewors.

Sounds similar to that tax collection collaborator Lester.

Vomit.

Ja. Simple. Done it already. It took a month to get a certificate of residency from where I am now, then another month each for SARB and Absa to go through the motions. It has no impact on my SA citizenship. Boerewors can be bought at Wandsworth, Victoria, Wimbledon, Piccadilly, etc. As for relatives, there isn’t anything that a remittance from Worldremit, WU, MG, etc, can’t fix. Twit

@NR. Absolutely & good point, as its very seldom mentioned.

For those planning proper emigration (i.e. with the intention to become tax resident of another country) if you can, and have the time for that…try to stagger your sale of SA assets over a few years, e.g. spread over 2 or 3…so that no huge CGT impact applies to one tax year only. But do it in the time leading up to the year one plans to relocate, as in the relocation year, SARS will either try to determine to tax you on foreign income as SA-resident ( being classified as ‘temporarily abroad’), OR you become Non-resident in that year, but then will have to face CGT. By that time…if SA assets were sold over a few years, the CGT-impact will be negligible.

(Actually sad to give advise to fellow S’African taxpayers to leave the country. But we’ve here to help others.)

Will SARS pay a refund if foreign tax rates are higher than in SA?

This is how Socialism fails! They bleed the income earners whilst the trough for the “needy” grows exponentially, thus breaking the system.

You’d be surprised. Young South African professionals are known to be hard-working, committed individuals.

I have friends that have moved over the last three years to Oz (architects), US (CA), UK (finance profs, teacher and engineer), Ireland (Dr), Japan (film producer), Korea (teachers), Germany (engineer & physicist), Singapore (finance profs). It’s actually quite eye opening when I list them like this, and these are only a few that I know of.

All university educated, all under 30, all now lost to SA.

If you’re qualified and smart enough you can go anywhere you want.

Believe what you want. Those are the facts. Seems you are the bigot here..

Yes, Aus and the US are the only models to follow…as for bigoted racists, the USA is certainly leading the way of late. The bigot is the one who ran away and now deems himself worthy of fixing ills of a country he left.

Rubbish- there are too many professionals in world

i agree and could relate similar stories
seems a lot of the best are going elsewhere, pity the members of NUM etc do’nt have same work ethic- industry would be in a better place ,
with them the mantra is” more money for less work”

Rob, you seem even more grumpier today…. you need a hug?

There are very hard working nurses, medical staff and other workers here in Saudi Arabia, and the only real benefit we get for working in what I would describe as “uncomfortable” working conditions and very high cost of living, is the difference between the untaxed income offshore and the taxed income in RSA. If we lose that, there is no incentive to work offshore.
This will lead to a mass return to RSA and not all of us will find work, adding to the ranks of the unemployed.
Additionally, RSA will lose out on substantial foreign income from all the remittances sent each month.
If there are any RSA workers reading this or people who know ex pat workers please can they draw attention to this site and get involved please?
If you have no already done so, please could you join the South African Tax Petition Facebook Group and vote?
You can also make individual representation to the SA Treasury, as I have done.
The website is:
https://www.facebook.com/groups/259663141112093/
The deadline is 18 August 2017.

OK Robert, seeing as you are so smart……so the people offshore who apparently won’t move away….they go back to SA. Many of them are older white guys – certainly a lot of those kind of guys are in the UAE – so what chances do they have of being employed? Close to zero.

So, you move from a situation where those guys were remitting money back to SA (as do most expats), are now back in SA claiming grants….. But, we can all be happy as we are now in line with best practice?

I agree with Enlightened, the younger guys will just duck – they have nothing to lose and everything to gain.

To Robertinsydney. You run with the hares and hunt with the hounds. Your wheel is turning but your hamster is dead. Get back in your kennel. You have proved yourself to have less credibility that Jacob Zuma. And he is not rated that high for you to be proud.

Just get on with your life and business in Australia and stop stirring the pot to incite others because you regret having left South Africa and cannot admit it.

except you can get a $100k pa foreign tax allowance as a US national working in another jurisdiction. I’d like to see something like that for SA nationals. The problem is SA needs more income, so those that can need to make tax plans like switching tax residency…

To robertinsydney=>

If you so happily left the RSA for Sydney, why bother coming to this website/blog?

We all have a fair idea of the very big problems on hand in RSA,
any intelligent professional knows that the righ thing to do is to leave RSA.

What is the big deal?

The odds are on the following:

RIS is not named Robert, and does not live in Sydney.

He is a locally-born troll, and his here to promote a general atmosphere of hostility, prevent constructive discussion or engagement, and encourage the general climate of anxiety and fear.

Whether he is paid to what he does, or if he just does it out of spite and hate, is not clear.

edit: … locally _resident_ …

As long as our neo-marxist, criminal enterprise ANC is running the show, they will find every conceivable way under the sun to broaden their collections since economic growth is not possible within their policy framework.

I’m one of those professionals who for a host of reasons will be leaving for greener pastures. The window of opportunity is closing for those who are considering emigrating. To those who haven’t acted but want to, I say act fast without delay.

The main problem seems to be with those working in places like UAE or often other African countries. These people have NOT emigrated, they are mainly contract workers whose residence, typically in UAE is geared specifically to a particular employment contract. Most are there to create some wealth in order to return to South Africa and afford to retire here, or have seen their job opportunities dry up here. These workers frequently continue to contribute to Retirement funds and investments in SA, many still have property. They cost South Africa nothing but still continue to invest here. If this legislation goes through most will not be able to afford that high cost of living and may have to return to South Africa. Those lucky enough to have dual citizenship may decide to cut the ties and disinvest from SA. How does this help South Africa. One more grasping at straws to bolster up this ailing economy.

It is not a matter of emigration but rather a matter of tax residency. I have not emigrated to the UAE yet I have lived here for 11+ years. There is absolutely NO WAY that I can be regarded as a South African tax resident, especially since I no longer have any financial interest in South Africa (except for a vacant stand of 22Ha near Hoedspruit). I have zero plans to return to South Africa. I have no retirement fund in South Africa. People in a similar situation to me need not be concerned — the proposed legislation is NOT aimed at us.

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