South African expatriates should not only understand the new expatriate 2020 tax laws, which endangers their foreign income but should also act if they want to avoid its dire consequences.
INCOME TAX ACT AMENDMENT (2017)
The amendment to the Income Tax Act has been fully enacted and forms part of the Taxation Laws Amendment Bill of 2017. Despite this, many South African expatriates are under the false impression that the law has not been formally amended and will thus not affect them.
The new law states:
“There shall be exempt from normal tax any form of remuneration to the extent to which that remuneration does not exceed one million, two hundred and fifty thousand Rand in respect of a year of assessment and is received by or accrues to any employee during any year of assessment by way of any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument or allowance… in respect of services rendered outside the Republic by that employee for or on behalf of any employer if that employee was outside the Republic.”
The amendment requires South African tax residents abroad to pay South African tax of up to 45% of their foreign employment income where it exceeds the threshold of R1.25 million.
Although the R1.25 million thresholds may seem generous, employment income includes allowances and fringe benefits paid to expatriates that cannot be considered as “earnings”.
The provision of housing, security, and flights, among other things, are often part of the packages offered to South Africans to induce them to work in foreign locations. These benefits can quickly add up to the R1.25m threshold, particularly in the expensive countries in which expatriates often live.
When it comes to expatriate options, there are effectively two schools of thought, excluding the “head in the sand” approach. These options are based on the intention of the South African expatriate.
There is so much misinformation flying around the South African expatriate community at the moment. Service providers perpetuate this using scare tactics and promoting what will benefit them and their bottom line over what is best for expats at large. First of all, there can never be a one size fits all approach. Financial Emigration (“FE”) requires certain criteria to be met before one can undergo the process.
Likewise, using a Double Taxation Agreement (“DTA”) will only be suitable for certain individuals. Before going into the advantages and disadvantages of both, it must be noted that South African’s abroad whatever their decision should absolutely get to know the tax law that currently affects them and will affect them.
Financial Emigration is the formal process to note oneself as a non-resident for tax and exchange control purposes in South Africa. The process ensures that one has met all requirements under the Income Tax Act No.58 of 1962 to ensure that one is a non-resident in accordance with South Africa’s tax residency tests and also ensures compliance with all exchange control regulations for non-residency. It must be noted that financial emigration does not automatically ensure that one is no longer a tax resident however is a crucial and key step in formalising the “non-resident” tax status.
The financial emigration process includes an application to the South African Reserve Bank (SARB), which is facilitated by an authorised dealer, to place on record the intention of formal emigration.
One of the SARB requirements for emigration is a tax clearance certificate that is obtained from SARS. The tax emigration process has to be followed and as previously mentioned, a CGT will be applied to the gain/loss on the deemed disposal of the assets.
Financial emigration should not be considered if the individual is not clear regarding his/her intentions.
Undergoing the Financial Emigration process proves one’s intention to permanently reside outside of South Africa which coincides with South African tax residency tests – thus the formalisation of both exchange control and tax residency statuses being noted as “non-resident”.
FE is very much auctioned on the basis the below South African tax 2020 residency tests:
ORDINARILY RESIDENT TEST
The question of whether a natural person is ordinarily resident in a country is one of fact and each case must be decided on its own merits, taking into consideration principles established by case law. It is not possible to lay down hard and fast rules. When assessing whether a natural person is ordinarily resident in the Republic, the following factors will be taken into consideration:
An intention to be ordinarily resident in the Republic
The natural person’s most fixed and settled place of residence
The natural person’s habitual abode, that is, the place where that person stays most often, and his or her present habits and mode of life
The place of business and personal interests of the natural person and his or her family
Employment and economic factors
The status of the individual in the Republic and in other countries, for example, whether he or she is an immigrant and what the work permit periods and conditions are
The location of the natural person’s personal belongings
The natural person’s nationality
Family and social relations (for example, schools, places of worship and sports or social clubs)
Political, cultural or other activities
That natural person’s application for permanent residence or citizenship
Periods abroad, the purpose and nature of visits
Frequency of and reasons for visits
The above list is not intended to be exhaustive and is merely a guideline.
This is where financial emigration falls in! FE is one of the objective factors to determine ordinarily residence – probably the strongest factor by far!
PHYSICAL PRESENCE TEST
The requirements refer to the number of days that a natural person must actually be present in South Africa, during a year of assessment and also during the five years of assessment preceding the year of assessment under consideration.
These requirements are that the person must be physically present in the Republic for a period or periods exceeding – 91 days in aggregate during the year of assessment under consideration; and 91 days in aggregate during each of the five years of assessment preceding the year of assessment under consideration; and 915 days in aggregate during the five preceding years of assessment.
A natural person who complies with all the requirements referred to above is a resident of the Republic, for tax purposes, for the year under consideration.
In addition, any individual who meets the physical presence test, but is outside South Africa for a continuous period of at least 330 full days, will not be regarded as a resident from the day on which that individual ceased to be physically present.
THE EXEMPTION AS OF 1 MARCH 2020 AND WHAT IT MEANS IN TERMS OF SECTION 10 (1)(O)(ii)
Residents will still be required to observe the 183 and 60 full days’ requirements in order to qualify for the exemption. Provided the “days” requirements are met, only the first R1.25 million of foreign employment income earned by a tax resident will qualify for exemption with effect from years of assessment commencing on or 1st March 2020.
Any foreign employment income earned over and above R1.25 million will be taxed in South Africa, applying the normal tax tables for that particular year of assessment.
DOUBLE TAXATION AGREEMENT
Firstly, South Africa does not have DTA’s with all countries, so this will only apply to an expat that is living/working in a country that has concluded such an agreement with South Africa. Fortunately, many countries, especially the main South African expat destinations, do have DTA’s with South Africa.
WHAT IS A DOUBLE TAXATION AGREEMENT?
A DTA is an agreement between two countries, namely South Africa and a foreign jurisdiction. Not every jurisdiction has a DTA in place with South Africa, so only if one has been set up is the opportunity there to make use of it. Importantly, one must meet the requirements of the DTA to ensure that they can apply it to exempt their foreign earned income from South Africa. This process must be done on an annual basis, whereby one must declare their foreign income in SA and claim exemption. SARS is likely to then place the taxpayer under verification or audit whereby the taxpayer must prove non-residency according to the tie-breaker test, in Article 4 of the DTA. One must also obtain a tax residency certificate from the foreign jurisdiction – this certificate generally states that in terms of the DTA that person is a tax resident of the foreign jurisdiction. This certificate would then be supplied to SARS if and when requested. A deemed disposal must also be done in these cases.
ADVANTAGES & DISADVANTAGES
The advantage of applying a DTA is that you do not need to undergo any formal process in South Africa, it leaves an expat with the opportunity to make decisions on a whim as long as the expat ensures that it still fulfills the requirements of the DTA to be a non-tax resident in South Africa.
Undergoing this process is somewhat more complicated than FE and is generally used for those expats who are on short term work contracts and intend to return to South Africa within a few years.
DTA’s are also a less permanent solution, meaning that a person working abroad can apply the DTA and be fully exempt from paying taxes in South Africa on their foreign income and will not have to reverse any formal process if they do return to South Africa.
If you have not financially emigrated, and SARS comes knocking, the DTA may be your saving grace in holding off SARS from taxing your foreign income. Ensuring that you comply with the DTA if you choose this route, is of utmost importance if you want it to protect you.
PROCESS OF ACQUIRING A DTA CERTIFICATE
Applying a DTA to your situation is a yearly process, which means that every year you will need to “convince” SARS that you are a non-tax resident of South Africa in terms of the specific and relevant DTA. This is a disadvantage because it can become an administrative nightmare and having to prove to SARS you are non-resident on a yearly basis may be a battle.
Furthermore, to prove you fit the bill in terms of a DTA, SARS often requires a tax residency certificate to be submitted to them from the country you are paying taxes in. This may seem simple enough, however, this is often not the case.
For instance, in the UAE, obtaining such a certificate can mean taking two full days of your time to go through the process, or finding a service provider that will do this for you, and there can also be very stringent requirements in a country to obtain such a certificate.
Even more worrying is that certain countries don’t have a formal process in place to obtain or even supply such a certificate. In certain countries, service providers are charging a hefty fee and you will need to obtain this certificate every year. Thus, the costs, in the long run, could be far higher than that of financial emigration.
DTA’s are specific on the requirements one needs to meet to be considered a tax resident of a country other than South Africa. You, therefore, need to ensure that you take careful notice of those requirements and ensure that you meet them year to year.
Often South African’s abroad fall in a grey area being arguably tax residents in both South Africa and the country they have emigrated to, which the DTA attempts to make the final decision on. However, falling into this grey area means that it could make it far more complicated to prove to SARS that you are a non-tax resident of South Africa.
It is imperative to understand the options that are available and what the implications of those options would be. It would be highly recommended to obtain a legal tax opinion once one has established what one’s true intentions are and then proceed to examine the cost to benefit of those options.
Thank you for reading. There is absolutely NO WAY to avoid the new tax changes, and you should not entertain calls from anyone who claims they can. You should take professional tax advice from one of the big four auditors [PWC. KPMG, Deloitte & EY] with a specialist in SARS tax to gauge whether you may have this ongoing problem starting 2021.
If you would like to be pointed in the right direction do feel free to get in touch with my self.