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Tax Exemption for Foreign Employment Income : What You Need to Know

Posted 11 November 2016 under TaxTim's Blog


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Tax on Foreign Income

If you think earning an income from a global source isn’t taxable on home soil, I’m afraid I have some bad news. Whether you’re earning Dollars, Euros or Yen, as a South African, it’s more than likely you’ll have to pay tax on this income. This is because South Africa’s taxation system works on a residence-based tax system meaning we’re taxed on worldwide income.

There is, however, some good news!

Section 10 of the Income Tax Act offers a list of conditions where income earned (or at least a portion of it) for services rendered outside of South Africa borders will be exempt from income tax.

When is Foreign Income Not Taxable?

Your foreign income may not be subject to South Africa tax if you:

  • Have a formal employment contract with a foreign employer,
  • Are a South African tax resident,
  • Spend at least 183 days (roughly 26 weeks, or about 6 months) of a consecutive 12-month period outside of SA rendering services to your foreign employer, and
  • At least 60 of these days are continuous or unbroken.

"Try out our decision tree to see whether your foreign income is exempt from tax"

The 183-day / 60 Continuous Day Test

We find that the 183-day / 60 continuous day test is the most confusing condition to understand and calculate, so let’s flesh it out a bit.

Firstly, the 183 days includes all calendar days, not only work days. Weekends, public holidays, annual leave days, sick leave days and rest periods spent outside of SA (provided you’re employed at the time) are included in determining if you meet the 183-day condition.

Secondly, the consecutive 12-month period isn’t necessarily a calendar, financial or tax year. It’s any period of 12 successive months.

Let’s pretend you have a contract that starts on 1 April 2015 and is valid for 18 months, ending 30 September 2016. To see whether you meet the 183 day / 60 continuous day condition, you’ll need to do the following: 

  1. Mark the first date of your contract and count forward 12 months, e.g. 1 April 2015 to 31 March 2016
  2. Now determine whether you spent at least 183 days outside of SA during this period.
  3. Then see if at least 60 of the days were continuous, i.e. in a row with no break.

If you don’t meet the conditions using the above method, then repeat the steps but use the end date of your contract and work backwards 12 months, e.g. 30 September 2016 – 1 October 2015.

If, using either method, you meet the 183 day / 60 continuous day criteria, then you’re likely to receive at least a portion of your remuneration as non-taxable.

Let’s now have a look at how SARS works out the apportionment of your income to determine the amount deemed to be exempt from tax.

How SARS Works Out the Non-Taxable Portion of Remuneration

The amount of your remuneration for the year that will qualify to be exempt from income tax comes down to how much of your income was earned while being outside of SA borders.

Here’s the formula that is used:

(Working days outside of SA for the specific period / by the total work days for the period) x the remuneration received for the period.

For the above formula, it’s important to note that work days only refer to days where services are rendered, and therefore exclude weekends, public holidays or leave taken.  Furthermore, the period refers to the full period during a year of assessment over which a taxpayer is required to render services outside of SA.

We’re going to do a calculation by way of example.

Kelly is employed by a South African subsidiary of a multi-national company. She was requested to travel to Geneva to assist with the set-up of a new Swiss office for the company. She left SA on 1 May 2015 and commenced work on 2 May 2015. Kelly was contracted to work in Switzerland until 19 December 2015. The subsidiary company in Switzerland paid Kelly a total of R650,000 remuneration for this period. On 20 December 2015, Kelly departed Switzerland to return to South Africa.

During her contract period in Switzerland, Kelly returned to South Africa 3 times to assist her local team with a project. These dates, which included travel time, were as follows:  

  • 22 June 2015 to 6 July 2015;
  • 30 August 2015 to 7 September 2015
  • 11 November 2015 to 20 November 2015

In addition, she took 3 days’ annual leave from 17 to 20 November during her third trip to South Africa.

First we need to test the 183-day / 60-day rule. We can do so by plotting the number of calendar days that Kelly worked in Switzerland by using a basic table:


 

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Total

2 May 2015 - 21 Jun 2015  30 21             51
7 Jul 2015 - 29 Aug 2015     25 29         54
8 Sep 2015 - 10 Nov 2015         23 31 10   64
21 Nov 2015 - 19 Dec 2015             10 19 29
                  198

We can see from the above that Kelly has spent a total of 198 days outside of the country. From 8 September to 10 November 2015, she spent 64 consecutive days in Switzerland, therefore satisfying the 183/60-day test and as a result, a portion of her R650,000 income will qualify for exemption.

Now let’s look at the apportionment calculation.

We need to know the number of work days that Kelly spent outside of SA, compared to the total number of work days in the period.

 

Total work days during period

Actual work days outside of SA

Actual work days in SA

2 May 2015 - 21 Jun 2015 36 36  
22 Jun 2015 - 6 Jul 2015 10   10
7 Jul 2015 - 29 Aug 2015 40 40  
30 Aug 2015 - 7 Sep 2015 5   5
8 Sep 2015 - 10 Nov 2015 46 46   
11 Nov 2015 - 20 Nov 2015 8    5* 
21 Nov 2015 - 19 Dec 2015 21 21   
Total 166 143 20

*The 3 days annual leave must be deducted from actual work days for the calculation.

The portion of Kelly’s remuneration that is exempt from normal tax in South Africa is calculated as follows:

Work days outside South Africa for the period = 143
Total work days for the period = 163 (166 days less 3 leave days)
Remuneration for period= R650,000

(Work days outside SA / total work days) x Remuneration
= (143/163) X R650,000
= R570,245

This is the portion of Kelly’s remuneration that’s considered non-taxable as it’s directly related to services rendered outside of SA. The remaining R79,755 will be subject to SA income tax, as she was working in SA for those days.

The Matter of Rest Days

In some instances, foreign employment contracts require and enforce rest days in accordance with their Health and Safety Regulations. For example, if you have a job on an oilrig outside of SA, it might be a condition of your employment that you work for a specific number of days or weeks before taking a certain number of days or weeks as rest days. During this rest period, you’re still employed, however you’re not physically rendering services.

In cases like these SARS takes the view that during a qualifying period (i.e. the 183/60-day test is met), all remuneration that can be attributed to services rendered offshore will qualify for exemption and no apportionment must be done.

A few employers may be brave enough to apply this section of the Act to the taxpayer’s situation and not deduct employee’s tax, however most will take the safer route of withholding tax, leaving the onus on the employee to do their annual tax return for a refund of the tax paid.

In all occurrences of foreign employment and related travel, it’s worth it to have a schedule of days in and out of SA prepared along with your tax return. SARS will want a copy of your passport showing the various entries and exits to substantiate your claim.

If you’re in a position where you’re working for a foreign company outside of South Africa for extended periods of time, it would be wise to familiarise yourself with the tax guidelines and implications – most especially those related to the qualifying criteria and apportionment calculation for tax exemption. Jetting back and forth may impact your ultimate tax liability, so think twice before you book that plane ticket home!

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