Proposed expat tax changes
MAY RESULT IN EMIGRATION AND COMPANIES BYPASSING SA.
Stakeholders are currently collecting data on the wider ramifications of National Treasury’s proposed amendment to expat tax exemption. This is following concerns that it could come at a significant cost to certain employers, individual tax residents and the attractiveness of SA as a gateway to Africa.
The proposal, expected from March 1 2020, would mean SA tax residents working abroad for over 183 days a year (60 continuous days) will be taxed in SA. Only the first R1 million of foreign remuneration will be exempt and tax residents would only be eligible for a tax credit where tax was paid offshore. Currently, employment income earned on foreign services that meets these requirements is exempt from tax in SA, subject to conditions.
KPMG’s Beatrie Gouws says while the exemption threshold should limit the impact of the amendment for lower- to middle-class, self-sponsored SA tax residents who work abroad in high-income tax jurisdictions, it seems the R1 million exemption will provide little relief for employer-sponsored workers on assignment and some employers could be worse off.
Employer-sponsored workers normally receive various fringe benefits - like relocation support, home leave and schooling assistance - to provide them with the same type of living conditions they had in SA, but these benefits are taxable.
If the employer also ‘tax equalises’ the remuneration package – effectively placing the employee in the same tax position they’d have been in if they stayed in SA – it can become complex and costly.
There’s also concern about the potentially onerous process of claiming tax credits.
While Sars previously advised Parliament’s Standing Committee on Finance that the tax credit system was working well, this hasn’t been their experience, Gouws says. Moreover, provisional tax liabilities will be difficult to estimate, as most foreign countries’ tax years aren’t aligned with SA’s and it’s unclear what Sars would accept as sufficient proof of foreign taxes paid upon assessment.
If the proposal is implemented in its current form, there’s a risk that firms would enter foreign countries directly - not through an SA headquarter company or by using SA talent, she adds.
It could also be less beneficial for individuals to remain SA tax residents and for local companies to tender for projects in Africa.
Treasury argues the current exemption appears excessively generous and creates opportunities for SA tax residents to benefit from double non-taxation, but Gouws says closing the loophole could be shortsighted. Some businesses will be less competitive and SA tax residents may choose to exit SA, particularly if they don’t have many assets.
This could put strain on an already-small income tax base.
Gouws says although Treasury has softened its original stance, by allowing for a R1 million-exemption threshold, questions have been raised as to whether the updated proposal will ultimately benefit the fiscus.
She says submissions have been made to Treasury, arguing that the proposed amendment would result in a significant impact on the bottom line of companies engaged in current/future foreign inward investment into SA, and SA companies alike.