Dou­ble tax on for­eign in­come

Finweek English Edition - - Cover Story -

South Africans work­ing abroad have en­joyed the ben­e­fit of hav­ing their for­eign in­come ex­empt from the lo­cal tax net, pro­vided they met cer­tain cri­te­ria.

How­ever, this con­ces­sion may come to an end from 1 March 2019 if Na­tional Trea­sury gets its way. It pro­poses the re­peal of the ex­emp­tion as a whole in the lat­est draft Tax­a­tion Laws Amend­ment Bill.

In the Fe­bru­ary Bud­get it was fore­shad­owed that the ex­emp­tion would no longer ap­ply if the for­eign em­ploy­ment in­come is not sub­ject to tax in the for­eign ju­ris­dic­tion. Trea­sury stated then that the ex­emp­tion “ap­pears ex­ces­sively gen­er­ous” as the for­eign in­come may ben­e­fit from dou­ble non-tax­a­tion.

Ini­tially it pro­posed an ad­justed ex­emp­tion where the for­eign in­come will only be ex­empt from tax if it is sub­ject to tax in the for­eign coun­try.

Erika de Vil­liers, head of tax pol­icy at the South African In­sti­tute of Tax Pro­fes­sion­als, says this means if the South African’s for­eign em­ploy­ment in­come is sub­ject to tax in the host coun­try, they would have to claim a for­eign tax credit in their South African tax re­turn to pre­vent dou­ble tax.

“This is not as easy as it might sound and gives rise to prac­ti­cal con­cerns that are al­ready ex­pe­ri­enced by short-term as­signees who never ben­e­fit­ted from the ex­emp­tion […] as there is of­ten a very long de­lay in re­ceiv­ing the ben­e­fit of the for­eign tax credit.”

In the mean­time, the em­ployee car­ries the cash flow bur­den of the dou­ble tax. One of the rea­sons for the de­lay is the oner­ous re­quire­ment of prov­ing that the for­eign tax was payable to a for­eign gov­ern­ment. Such ev­i­dence is of­ten dif­fi­cult to ob­tain in prac­tice as tax sys­tems vary and some rev­enue ser­vices do not pro­vide proof.

Mike Ab­bott, head of wealth at Sable In­ter­na­tional, says South Africans work­ing abroad can claim the re­lief of a Dou­ble Tax­a­tion Agree­ment (DTA).

“You have to ob­tain a cer­tifi­cate of tax res­i­dency from the over­seas coun­try, but the onus rests on them to prove that they meet the cri­te­ria of the DTA’s def­i­ni­tions,” ex­plains Ab­bott.

A South African work­ing abroad may es­cape the pro­posed amend­ment if they are not deemed to be or­di­nar­ily res­i­dent in South Africa, but are deemed to be res­i­dent in the for­eign coun­try by virtue of the pro­vi­sions of a dou­ble-tax­a­tion agree­ment.

How­ever, the onus re­mains on the tax­payer to prove this. De Vil­liers says younger peo­ple in mid­dle man­age­ment might be more likely to sever ties with SA, and take the pain of the one­off exit charge (cap­i­tal gains tax on deemed sale of all South African as­sets) in favour of greater in­come sav­ings in the fu­ture. ■

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