Updated: Mar 11
If you are currently working outside of South Africa on a regular basis, the impending changes to the taxation of Foreign Employment might affect you.
How will the capped foreign employment income exemption work in practice? Is tax emigration the only option for South Africans working abroad?
This article was published in Professional TaxTalk, South Africa’s Leading Tac Journal, Issue 78 Sept/Oct 2019 and takes us through the history and the remaining questions around this exemption and its now limited application.
This is an extract from the article:
South Africa has a residency-based system of taxation, in terms of which South African tax residents are taxed on their worldwide income. Thus, foreign earned employment income, for services rendered outside South Africa, is taxable in South
Africa, unless exempted by inter alia legislative provisions.
The foreign employment income tax exemption, contained in section 10(1)(o)(ii) of the Income Tax Act, exempts (from South African tax) foreign employment income received by a South African tax resident for services rendered outside South Africa, where specified criteria are satisfied.
The services must have been rendered for or on behalf of any employer, the individual must have been outside South Africa for a period or periods exceeding 183 full days (in aggregate) during any 12-month period and there must have been one continuous period exceeding 60 full days during that 12-month period.
When releasing the Draft Taxation Laws Amendment Bill, 2017, for public comment, National Treasury announced its intention to repeal the foreign service exemption provision. This announcement marks the start of a highly contentious cloud of uncertainty that has plagued this provision to date. Following extensive and robust consultation with the public on this proposal, the Taxation Laws Amendment Act, No. 17 of 2017, was promulgated in December 2017, and it contained an amendment as opposed to a repeal of this provision, by introducing a monetary cap on the application of the exemption.
In its revised form, only the first R1 million (it has since changed to R1.25 million, announced at the Budget Speech in February 2020 - read more here) of a South African tax resident’s foreign remuneration qualifies to be exempt from South African income tax. The criteria to be satisfied to qualify for the exemption remain unchanged, i.e., the individual must have been physically rendering services outside of South Africa for 183 days (in aggregate) in a 12-month period, with more than 60 of these days being continuous.
Foreign tax credits to the rescue?
The capped exemption means that South African tax residents who earn foreign remuneration in excess of R1 million (now R1.25 million) are taxable on the portion that exceeds this cap.
Individuals impacted by this legislation, who have a South African income tax liability on so much of their foreign earnings as exceed thecap, may find themselves in a double tax situation. This would mean that the same earnings are taxable both in South Africa and the country in which the foreign earnings were sourced or the services rendered.
Relief from such a double tax position may be available tothese South African tax residents in the form of foreign taxcredits – for foreign taxes paid on their foreign earnings – under section 6quat of the Income Tax Act.
Section 6quat provides that foreign tax credits may be claimed to the extent that the foreign taxes are “paid or proved to be payable” in the foreign jurisdiction. This effectively means that such credits may only be available where affected tax payers provide adequate proofof the foreign taxes paid in respect of the foreign earnings subjected to double tax. Alternatively they are available where acceptable proof of a foreign tax liability on this income can be provided. Lack of clarity exists regarding what would constitutesufficient proof of foreign taxes paid or proof of foreign taxliability, where taxes have not yet been paid at the time the foreign tax credit is claimed. It is therefore questionable whether South African taxpayers impacted by this will be in a position to provide adequate and or timely proof of foreign taxes paid or the existence of a foreign liability on the foreign earnings in question. This lack of clarity is due to several factors briefly listed here below:
• Self-assessment taxes, such as personal income tax, do not require assessment from the revenue authorities in some countries such as the United Kingdom. Taxpayers earning foreign income from such jurisdictions will experiencesubstantial difficulty in obtaining proof of foreign taxespayable.
• A substantial number of African countries do not havepersonal income tax filing obligations. This in effect meansthat individuals may not be in possession of assessments by revenue authorities to prove that foreign taxes have in fact been paid. It is not clear what form of alternative proof of the foreign taxes paid on a self-assessment basis will beaccepted by SARS. Proof of payroll withholding may not be accepted, as payroll taxes are not considered to be a finaltax in numerous foreign tax jurisdictions.
• The difference in tax years between countries is another added complexity that may mean the required proof of foreign taxes paid, or an assessment from revenue authorities, may not be available at the time of claiming the foreign tax credits.
Clarity is therefore required by taxpayers on what wouldconstitute sufficient proof of foreign taxes paid or proof of aforeign tax liability, where taxes have not yet been paid at the time the foreign tax credits are claimed. Though this problemcurrently exists, it may be magnified by the introduction of thecapped provision, due to the increased need for relief from double taxes that is anticipated.
Should the foreign tax credit be successfully claimed by taxpayers, they will be limited to the amount of tax the individual would have paid had the income been earned in South Africa. Further to this, no tax credit will be available for tax paid in a foreign jurisdiction if it does not qualify as a tax in South Africa, such as social security.
An individual seeking relief from double taxation by claimingforeign tax credits under section 6quat can ordinarily only do sowhen submitting a tax return. A welcome proposal was made in 2019 by National Treasury that will provide substantial cash flow relief for South African employers impacted by this amended legislation.
Those who have a withholding tax obligation in respect of their employees’ foreign remuneration will be able to claim these foreign tax credits via the payrolls. Their monthlylocal employees’ tax withholding can be reduced by the amountof foreign taxes withheld on employment income in the foreign jurisdiction. However, lack of clarity exists around whether tax directives will be required by employers seeking such relief, whether such applications have to be made annually or monthly,as well as the requirements to be satisfied by employers inapplying for such a directive.
Ceasing South African Tax Residency
The present amendment to the foreign service exemption may have a substantial impact on South African tax residents earningforeign remuneration in excess of R1 million.
Breaking or ceasing South African Tax Residency has become a highly publicised
and seemingly attractive consideration to those looking to fall outside of the negative impact that this legislative amendmentcould have on their tax affairs. However, ceasing South African tax residency can be a complex and expensive escape from the impact of this amendment. It is thus highly advisable that sound and professional tax advice is sought by South African tax residents considering this.
Increased media coverage on this amendment has led to substantial inaccurate communications and advice being published on the matter. Some of these inaccurate communications have used the two concepts of financial emigration for purposes of South African exchange control and of ceasing South African tax residency synonymously, which is not necessarily correct. These two concepts are notsynonymous and have different implications. In the context of theamended foreign service exemption, only ceasing or breaking South African tax residency may be directly relevant in potentially resulting in an individual falling outside the net of application of this now revised and capped provision.
Double taxation relief?
It will be interesting to see what form of relief will be available to South African tax residents impacted by this amended provision.Relief may be available under South Africa’s extensive regime of Double Taxation Agreements, where the South African domestic legislation does not provide the required relief. It is questionable whether any relief will be available outside of possibly breakingan individual’s tax residency status from South Africa through thetie-breaker clause.
With the effective date of this amended provision less than a year away, it is highly concerning that substantial uncertainty still exists amongst taxpayers, their affected employers, tax practitioners and the tax community at large.
Original article credit: Arlette Manyi
published in Professional TaxTalk, South Africa’s Leading Tac Journal, Issue 78 Sept/Oct 2019