MURKY WATERS
Where should SA divers working in the UK pay tax? A double tax treaty between the two countries has left the courts at sea
After reading a recent UK appeal court tax decision, I have a new fan tasy: in my next taxpayer incarnation I want to be a diver, living in SA but periodically working in the UK.
The case concerns MF Fowler, a qualified diver from SA who periodically works in the North Sea waters off the UK. Conditions are difficult and dangerous, but he is paid well — so well, in fact, that the UK tax authorities want a bit of the action for themselves. But each time Fowler’s case has gone to court, the outcome has changed.
A double taxation treaty between the UK and SA has made it difficult for the courts to answer a crucial question about Fowler’s case: which of the two countries is entitled to tax the income he derives from his diving work?
The latest decision makes much of the fact that the word “employment” is not properly defined in the treaty. To a layman, this is a bizarre omission in a tax treaty, given that tax follows paid employment just as night follows day. But it at least partly explains why the answer to Fowler’s tax conundrum is proving so elusive.
In brief, the problem is this: if payment to Fowler is considered “employment”, then it falls under article 14 of the treaty and is taxed by UK authorities; if he is considered “self-employed” and it is thus considered “business profit”, it falls under article 7, to be taxed under SA law.
Because the treaty doesn’t define “employment”, the court must rely on the definition under UK law, which treats employed divers as “carrying on a trade”.
The first-level court held that Fowler’s income was business profit and should be taxed by SA. The next court overturned that decision. Fowler then turned to the court of appeal, where three judges have now delivered a split decision, one finding that the funds should be taxed in the UK, and two finding they should be taxed in SA.
The courts accept that SA divers are protected from paying tax in the UK if they are self-employed. But with this decision, the majority has gone further, saying that if divers are deemed to “carry on a trade” under contract employment, they should be protected in the same way as self-employed divers who “actually carry on a trade”.
The majority thus held that Fowler’s income must be regarded under the treaty as “business profit” and not “employment income”.
While the outcome could be challenged, experts say tax matters rarely go higher than the court of appeal, so this decision may well stand.
Tax free
If this is the final word, at least in relation to Fowler’s taxable income for 2011/2012 and 2012/2013, then what slice would the SA Revenue Service want from him? The answer: probably nothing.
Under the Income Tax Act, Fowler would be exempt from paying tax on foreign-earned income if — as he does — he were to meet several conditions including, for example, spending more than 183 days in a 12-month period outside SA, with more than 60 of those days running consecutively.
SA tax consultants working with divers such as Fowler say many like him have not paid tax for more than 10 years. But things are about to change, with an amendment, effective from March 2020, that will make only the first R1m exempt, even if the usual conditions are met.
Fowler’s fellow SA divers working overseas are surely celebrating his victory, but there is no guarantee that they will be covered by the new decision.
His victory turned on narrow definitions, and the UK tax authorities will obviously scrutinise the contracts and working arrangements of other divers very carefully.
With the wide variety of hiring arrangements offered to divers, there is no guarantee that at least some of them might not be taxed in the UK.
What slice would the SA Revenue Service want from Fowler? Probably nothing