South African Expat options in lieu of the new tax changes on foreign employment income
Should you formally emigrate? Is financial emigration the best route or can South African expats rely on Double Taxation Agreements (DTAs)? The changes to Section 10(1)(o)(ii) of the Income Tax Act is looming for South Africans working abroad. With just more than twelve months to go, South African expats are scrambling to determine what their best course of action is to avoid paying additional taxes, in South Africa, on their hard-earned foreign employment income.
The proposed changes were covered extensively in the media, therefore we will only do an overview of the proposed changes.
Initial Proposal: Repeal Section 10(1)(o)(ii)
It was proposed that Section 10(1)(o)(ii) be repealed in its entirety meaning that expats, who are still residents for tax purposes in South Africa, would not only pay tax in the country they worked in but also in South Africa. This would lead to double taxation.
If a DTA exists between South Africa and the country in which the taxpayer rendered the employment services, then it is possible to escape the double taxation either in full or at least to a large extent.
The proposal attracted an outcry from both South African expats and tax experts alike.
Amended Proposal: First R1 million Exemption
In terms of the Bill, the Act will be amended to allow the first R1 million of foreign remuneration in respect of a year of assessment to be exempt from tax in South Africa if the person is outside of South Africa for more than 183 days and for a continuous period of longer than 60 days during a 12 month period.
A special workgroup is underway to discuss all the implications further. You can read more about that here.
The problem with Double Taxation Agreements
A DTA sounds like a great escape, and it could be, but there are a few challenges one must consider:
- No two DTAs are the same. Each DTA between South Africa and the other country is unique.
- Some DTAs are old. I recently dealt with a South African expat working in Germany. The DTA between South Africa and Germany was concluded in 1975 and I could find no evidence that it has been updated or changed since then!
- Applied to each case individually. There is no standard. Each case is treated on its own merits and the outcome is never certain.
- Must be proved each tax year. The taxpayer must prove every tax year that they are a resident in the other country and that they meet the requirements of the applicable DTA. The other country and SARS will decide where residency for tax purposes will be awarded. Depending on one’s circumstances, it can be very difficult to convince SARS that you should be resident in the other country.
- No security. Even if a decision was made, SARS can change their decision in a subsequent year, even if one’s circumstances have not changed.
This does not mean that a DTA is useless. It certainly is not, otherwise, there would be no need for them. Relying solely on a DTA without considering alternative options, can cost one dearly.
Is financial emigration the answer?
As with most things related to tax, the answer is not that simple.
It is a legal requirement to formally emigrate when one decides to leave South Africa permanently. Therefore, if someone decides that working offshore is a temporary thing, even if it is for 10 years, then there is no need to emigrate. Their intention is to return to South Africa and therefore still see South Africa as their home. This will satisfy the Ordinarily Resident test and such a person will remain a resident for tax purposes.
If the intention is to leave South Africa permanently, then financial emigration has to be done. There are a number of implications one must consider, some of which are:
- Financial emigration will trigger a deemed disposal of all one’s worldwide assets, but excluding fixed property, for Capital Gains Tax purposes. Such taxes must be paid, which can put a drain on one’s cash flow.
- Financial emigration can be backdated, which can minimise or reduce the impact of Capital Gains Tax.
- If one returns permanently to South Africa after formally emigrating, then the process will have to be reversed.
- One’s South African bank account will be changed to a blocked-account and you will need to work through someone at the bank when there is a need to transact through such account.
What should South African expats do?
The best course of action is to do your own homework and to seek the advice of a tax professional. Tax is very personal and unique for each person. Two South African expats working in the same foreign country can have vastly different outcomes based on individual circumstances.
Other related articles to read
https://www.cliffedekkerhofmeyr.com/en/news/publications/2017/Tax/tax-alert-3-november-amendment-in-respect-of-foreign-employment-income-exemption.html
https://www.pwc.co.za/en/assets/pdf/tax-alert-section-repeal.pdf
