Tax on South Africans working overseas is a myopic miscalculation
On the whole, the Treasury does a fine job of crafting regulations for the domains it oversees. But every now and again there is a major misstep, and those tend to have to do with tax. Somehow, the Treasury has fits of myopia when it perceives what it thinks to be a tax loophole. It brings out a sledgehammer, usually breaking far more than it expects.
It added to its record of bad tax ideas last week with a proposal to do away with the 183day rule that allows South Africans working overseas to be exempt from paying tax in SA.
The proposal was part of a wide-ranging set of amendments to tax legislation, most of which were routine. But this change was a rude shock, with February’s budget giving no hint of the scope of the amendment that was coming.
The consequences are potentially dramatic. At the moment, if you’re a twentysomething wanting overseas experience, you can work anywhere in the world and not have to worry about the South African Revenue Service (SARS) chasing you for income you earn abroad. If you’re a company wanting to open up in Dubai or anywhere else, you can use South African expats on the same terms that your competitors are able to employ their workers, ensuring you can compete on a level playing field.
In the February budget, then finance minister Pravin Gordhan flagged an intention to stop South Africans heading off to zero-tax jurisdictions such as Dubai to earn money while ensuring they spend 183 days out of the country to avoid paying any tax anywhere.
But the removal of the exemption also means people who are living and working in say London, and happen to be at a point of the progressive tax rate structure where they pay less tax than in SA, they will now have to pay the difference to SARS. Full disclosure: I am resident in the UK.
It will cost people working abroad money, but also add a huge bureaucratic burden. Those currently working and living abroad have to continue filing returns to SARS but need only demonstrate that they have spent more than 183 days (and 60 consecutive) out of the country. They would now have to disclose full details.
Because the South African tax year runs on a different calendar to other jurisdictions, they will have double the tax administration burden.
And just how will they get the credits if the timing of tax years mismatches? The UK tax year ends on April 5 while the South African one ends on February 28.
So how will the cash flows work? Will people have to pay tax to SA and then claim it back after having paid the UK’s revenue service in April?
And what taxes count? Do national health insurance contributions in the UK count as a tax that can be claimed against South African obligations? Does council tax paid for garbage collection in London count? And while basic income taxes in the UK are slightly lower than SA’s, if national insurance is excluded, VAT is higher. So why should I have to top up my South African income tax, but not be able to claim back the difference in VAT rates? Does SARS really want the headache of having to figure out the questions for every tax jurisdiction in the world? There are very few people who will be willing to put up with the bureaucracy and cost when formal emigration provides a very simple way to avoid it.
There are probably hundreds of thousands of South Africans living and working in the UK and other countries who remain tax resident in SA. They often maintain African residency largely for family reasons or because they want the option of being able to return to SA.
The Homecoming Revolution, a company that attracts South Africans who are working around the world back to SA, says hundreds of thousands have returned over the last several years, bringing their skills, assets, and tax-paying power back to SA. If those people had formally emigrated, that would have been much harder.
Formal emigration has a cost for those who have already built a life and asset base in SA, because it is treated as a capitalgains tax event.
That means they will be hit with capital gains tax on all their assets on emigration.
But for younger South Africans without assets, there is no cost to emigrating.
The problem the Treasury says it wants to tackle is South Africans paying zero tax, but this is a blunt instrument that does masses of harm with almost no good. The net effect over the long term on tax collection is very unlikely to be positive. The Treasury has long championed economic impact assessments for proposed legislation. It should do one in this case.
HUNDREDS OF THOUSANDS HAVE RETURNED OVER THE PAST SEVERAL YEARS, BRINGING SKILLS BACK TO SA