It has been widely publicised what the changes in the “Expat Tax” laws may have for expatriate employees from South Africa. However, it should be noted that there are also potential implications for the South African employer of the expatriate.
If an employee qualifies for the section 10(1)(o)(ii) tax exemption, it means that R1,250 million of their remuneration generated while working offshore will qualify for exemption from normal tax in South Africa. This exemption will only be allowed once declared in the individual’s personal annual tax return.
However, in terms of paragraph 2 of the Fourth Schedule, the employer is obliged to withhold employee’s tax from an employee’s remuneration and pay it over to the South African Revenue Service (“SARS”) on a monthly basis.
Therefore, if the employee qualifies for section 10(1)(o)(ii), how does the employer calculate the monthly employee’s tax? This could lead to financial hardship for the employee as the South African employer (home country) is obliged to calculate and withhold employee’s tax whilst the host country may also be obliged to calculate and withhold employee’s tax in the foreign country in terms of their local legislation.
In terms of paragraph 10 and 11 of the Fourth Schedule, an employer may apply for a tax directive from SARS that would allow for a change in determining the amount of employee’s tax to be withheld in South Africa. SARS has issued a specific directive application form to be used in these circumstances.
This would allow the employer to adjust the employee’s tax to be withheld from the expatriate employee’s monthly remuneration if:
- The employee qualifies for the exemption in terms of section 10(1)(o)(ii);
- The employee’s remuneration exceeds R1,250 million; and
- The employee has been subject to tax in the foreign country.
This would alleviate the financial hardship in South Africa as it would effectively result in the expatriate only being exposed to the monthly employee’s tax in the foreign country.
Once the employer has obtained the directive, they would be able to take the foreign tax credit into account on a monthly basis when calculating the employees’ tax liability. It should however be noted that the employee is still required to claim the final foreign tax credit under section 6quat in his/her annual tax return in South Africa in order to obtain the final relief.
There are currently still some technical difficulties with the manual directive application, but we anticipate that this should be attended to once the application is in an electronic format.
The directive will be valid for an indefinite period until any facts & circumstances of any employee’s assignment change. Once there is a change to any of the employee’s circumstances, the employer is required to apply for a new tax directive.
In addition to the directive application, a detailed letter stipulating how all the requirements have been met should accompany the application.
We advise that you contact your Tax Practitioner for any further assistance in this regard.