Concessions to tax on foreign income bring some relief
Backlash from expats and businesses prompt a rethink on proposed reform to tax exemption.
THE TREASURY has made some concessions on its initial changes to the tax exemption on foreign income following a massive backlash from companies and South Africans working abroad.
The SA Revenue Service (Sars) and the Treasury received at least 8 000 complaints via social media, and more than 1 300 written submissions on its proposal in the draft Taxation Laws Amendment Bill to repeal the tax exemption on foreign income for people working on long-term contracts.
The Treasury has accepted the criticism that the additional tax will have a severe impact on people who have been sending money back to South Africa to support family living here.
It will now allow the first R1 million of foreign remuneration to be exempt from tax in South Africa if the individual is outside the country for more than 183 days as well 60 consecutive days in a 12-month period.
However, South Africans will be taxed on the remaining remuneration and will have to claim a tax credit in terms of the amount of tax they have paid in the host country.
“The exemption threshold should reduce the impact of the amendment for lower to middle-class South African tax residents who are earning remuneration abroad.
“The effect of the exemption will also be that South African tax residents in high-incometax countries are unlikely to be required to pay any additional top-up payments to Sars,” the Treasury said in its draft response document to the parliamentary standing committee on finance.
The date on which the new proposals will come into effect has also been postponed, to March 1, 2020.
Patricia Williams, a tax partner at Bowmans, said the postponement gave individuals a chance to get their affairs in order before the new tax rules came in. This might be particularly helpful for people who want to take the leap and change their tax status.
“If one lives and works in a country that has a double tax treaty with South Africa, changing one’s country of tax residence is often much simpler than one might expect, although there is a tax exit charge in relation to worldwide assets.
“Essentially the new proposal for the foreign income exemption is likely to only affect higher income earners, and only when these individuals are unable to change their tax residence away from South Africa before March 1, 2020, when the proposal will become effective,” Williams said.
Tarryn Atkinson, head of employees tax at First Rand, said the number of changes which impact expatriates introduced over the past few years might see a renewed interest in global mobility companies.
This means that an offshore-employment structure could be set up where everything can be managed by a centralised employment company which employs and distributes employees.
Beatrie Gouws, vice-chairperson of the SA Institute of Tax Professionals’ personal income tax committee, said on the side of the annual Tax Indaba that although the Treasury had said the tax credit system was functioning, they were of the opinion there was still a lot of work to be done.
“Currently, the tax credit system is being used only in certain circumstances because between the current exemption and double-tax agreements, the credit system has hardly been used.”
She said there was going to be a massive influx of people having to use it. In a lot of cases there was no proof of taxes paid in the host country, so there had to be specific rules on how to apply it.
In some instances, people waited two years to receive their tax credits. Williams noted that the Treasury referred to a “hardship directive” from Sars in relation to South African employees’ tax where there is double tax. A deduction of the foreign taxes can also be claimed in the South African provisional tax returns.
The Treasury did take note of the fact that the changes to the exemption would increase the cost of employment for South Africans working abroad. However, it said the introduction of the capped exemption should alleviate the increased taxation costs.