Foreign tax leaves few options

Jerry Botha

The draft tax law amendments for 2017, recently published by National Treasury, contains much-anticipated details on tax treatment of South Africans working abroad.

The draft law published proposes a far harsher tax treatment, recommending that the exemption section 10(1)(o)(ii) be completely repealed.

This means foreign employment income will become fully taxable, and the only relief may be claimed is foreign taxes paid as a tax credit.

For example, where the employee falls into the 45% tax bracket and pays 25% tax in the foreign country, the South African Revenue Service (Sars) will now collect the difference of 20%.

The current tax law determines that South African tax residents abroad must disclose their worldwide income to Sars, and may then claim an exemption on their employment income physically earned outside South Africa.

Then finance minister Pravin Gordhan announced in his February budget speech that changes to this section were on the horizon.

The suggestion was made that the exemption should not apply where the employee is not being taxed in the foreign country.

There are limited options for South Africans abroad, should this law take effect. One alternative would be to properly emigrate, in which case there is a deemed disposal capital gains tax event.

Sars probably anticipates this as a likely move, as the 2016-17 tax return now has a specific disclosure hereon, which never previously existed.

Other taxpayers are looking at establishing tax treaty residency in another country, but this is not as simple as getting a tax residency certificate somewhere else. Anyone who has been through a Sars process would know how complex this may become.

This law is proposed to take effect on March 1, 2019 onwards, so clearly there is a bit of grace period given for expatriates to get their house in order.

Jerry Botha is managing partner at Tax Consulting.

There are limited options for South Africans abroad, should this law take effect