It seems like the tax season, this year, has brought about more changes and proposals than we could’ve ever imagined. In July 2017, the National Treasury announced further proposals to the Foreign Employment Exemption changes already announced in the February budget (see foreign employment blog). There has been a huge amount of confusion amongst taxpayers in South Africa and mainly those expats working out of South Africa.
Earlier this year, in the February budget, the proposed amendments would have seen South Africans working overseas in tax havens or where they pay little or no tax on employment, subject to tax in South Africa. The latest amendments expand on that and do away with the exemption entirely, no matter where someone works or how much tax they’ll pay.
As part of our efforts to always assist taxpayers in simplifying changes which could affect them, we’ve identified three example types of taxpayers that this proposal could apply to. We’ve also explained how taxpayers, could be affected, should the proposals be made into law:
1. South Africans who have gone overseas for a short-term transfer and who intend to return home at the end of it.
Let’s say you’re working in South Africa, for a multi-national company which then sends you to their office in Dubai for 6-12 months, for you to gain some offshore experience.
Currently, in this type of scenario, you’d fall directly into the s10(1)(o)(ii) exemption. This means that you’d be filing your tax return in South Africa, but claiming your foreign employment income as an exemption due to you being out of the country for at least 183 days (60 being consecutive), within a 12-month period. So, you’d benefit from the favourable tax regime in the UAE, while your income is exempted from tax in South Africa too – the end result would be the chance to escape the tax net altogether.
It’s this type of arrangement that’s now in the spotlight. Treasury is proposing to tax the individual so that they pay tax at the rate as though they were working in South Africa.
Following on from our example, a taxpayer who pays 0% tax in Dubai and who has historically claimed the s10(1)(o)(ii) foreign income exemption on their South African tax return, may be required to pay tax on their foreign income in South Africa (e.g. 36%), based on the normal tax tables for individuals, should the proposal take effect as they‘ll now no longer have any of their income exempted
2. A South African who’s been working overseas for a number of years, but has not **“financially emigrated” and plans to return home at some point after their travels.
An example of this would be, if you left South Africa shortly after your studies to work in London for a few years. You may have ended up working there for multiple years, but you do have plans to return home “at some stage”. In this scenario, it’s likely that you’d pay tax in the UK and don’t consider yourself a tax resident* of South Africa and therefore don’t file tax returns here.
However, if you leave South Africa without “financially emigrating,” you may be viewed by SARS as a South African resident living temporarily abroad and you’ll be subject to the same tax laws and financial regulations as people living in South Africa.
Before the recent proposal, these types of taxpayers would’ve also fallen within the s10(1)(o)(ii) exemption. Technically, they should’ve been filing tax returns in SA and declaring their foreign remuneration which would then have been exempted under s10(1)(o)(ii). Even if they didn’t file tax returns and were therefore not 100% tax compliant, it doesn’t really matter much since their income tax liability would’ve been nil anyway due to the foreign income exemption.
It’s these types of taxpayers that will also be affected by the proposal. Following on from our example, a taxpayer who pays 20% tax in the UK and falls into the 36% tax bracket in SA on their rand equivalent earnings, may be required to pay an additional 16% tax (i.e. 36% - 20%) on their foreign income in South Africa, should the proposal take effect.
*It would always be advisable to check with a tax professional if you may be considered to have broken your South African tax residency at any point.
**Financial emigration involves a very specific set of procedures which results in the taxpayer changing their status to that of a non-South African tax resident. These include obtaining a tax clearance and recording their emigration with the South African Reserve Bank, as well as with SARS.
3. A South African who has” financially emigrated”.
If you work overseas and have recorded your emigration with the South African Reserve Bank and SARS, you’ll no longer be regarded as a tax resident in SA. You’ll be subject to the tax laws in the country in which you work. Therefore, you’ll only need to file a SA tax return if you earn South African source income e.g. you own and rent a property in SA. The s10(1)(o)(ii) exemption and proposed changes will thus not apply to you.
So, you might be wondering what should taxpayers think about when evaluating what to do about the proposed changes? We’ve highlighted four important points to consider:
1. The law, if amended, will only be effective from tax years beginning 1 March 2019. 2. Even if the law does affect you, you may not be liable for additional tax if you work in a higher tax jurisdiction. 3. Wait for TaxTim to provide more information as we learn more about the proposed changes. 4. The effects of any Double Tax Agreement may still override this proposal.