Impending changes to the taxation of foreign employment of South African residents
The general rule is that SA tax residents are taxable on their worldwide income. However, section 10(1)(o)(ii) provides a specific exemption for remuneration earned for services rendered outside SA if an employee spends more than 183 full days (including a continuous period of more than 60 full days) outside SA in any 12-month period during which those services are rendered outside SA.
Most foreign countries will tax the employment income of individuals who are earning income from employment in their country on a PAYE type system. The purpose of this exemption was to provide relief to SA tax residents from paying tax, both in the country where the services were performed as well as in SA. The 183 day and the 60 continuous days’ test, exempted SA residents from being liable for tax on the same income in SA, their country of residence.
However, many individuals are employed in countries where the employment income of foreign nationals is not subject to tax. These individuals would therefore pay no tax on that employment income, either in SA or in the foreign country where the services are rendered. This is obviously unfair and results in a situation of double non taxation. This goes against the intention of the exemption which was to provide relief against double taxation of the same income and not to provide double non taxation of the remuneration from foreign services.
In order to end the situation of double non taxation of foreign employment income, the section was amended in the Taxation Laws Amendment Act of 2017 with effect from 1 March 2020.
Initially it was intended to repeal the section in totality. However, after impassioned representations by affected individuals to National Treasury, the proposal was revised and the section continues to allow the first R1million of foreign remuneration to remain exempt from tax in SA if the individual meets the requirements of section 10(1)(o)(ii) in relation to that remuneration.
The effect is that if an individual earn remuneration exceeding R1-million from foreign services, the portion exceeding R1-million will be included in the person’s SA taxable income and taxed at the person’s applicable personal income tax rate.
It is important to note that this exemption is applicable to persons who are still considered tax residents of SA although they are performing services outside SA.
The practical implication of this for SA resident individuals is as follows:
If the individual in foreign employment earns more than R1-million, in a country where they have not been paying tax on remuneration from those foreign services, it is likely that they will be taxable on this income in SA.
If an individual in foreign employment earns more than R1-million, in a country where they have been paying a lower amount of tax on that remuneration than they would have in SA, it is likely that they will be taxable on the difference in tax in SA.
If that person was already paying the same or more employees’ tax in the country where the services are rendered, and now becomes liable for tax in SA, this might result in double taxation.
In situations where double taxation is possible because the individual is already paying tax in the country where the services are being performed, relief in terms of the foreign tax credit sections of the Income Tax Act or the application of a DTA are likely to be available.
If an individual is eligible for foreign tax credit or relief under a DTA, a directive would need to be obtained from the South African Revenue Service (SARS) to request relief from SA tax to the extent that a rebate in respect of the foreign taxes paid on that remuneration is available. In such cases, it is important that the individuals take advice on how to apply for these directives and to understand whether these must be applied for annually.
The change only impacts individuals who are South African tax residents. Many South African nationals working abroad are already non-resident from a tax perspective and will not be affected. In such cases the individual might have to provide evidence to SARS that he or she is not ordinary resident in SA. This is far easier to evidence when a person financially emigrates but it can apply with a change of intention to become an ordinary resident of the foreign country.
South African nationals working abroad are encouraged to obtain professional advice to enable appropriate planning and the assessment of any impact that the new rules may have on their future tax liability. It is not a one size fits all situation and specific advice on an individual’s personal situation should be taken. Many South Africans might already have already broken their SA tax residence and be in a better situation than they believe they are.
There is still time before March 2020 to put practical steps in place to ensure that relief from any potential double taxation has been arranged with SARS.