Double tax on foreign income
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. ■