Many South African tax residents render services abroad for a period of time during their lives. At present, the Income Tax Act (“the Act”) exempts income received by a South African tax resident, during any year of assessment, if:
- the income is in respect of employment services rendered outside South Africa (“SA”); and
- the individual was outside SA for a period or periods exceeding 183 full days in aggregate during any twelve-month period; and
- such individual was outside SA for a continuous period exceeding 60 full days during that twelve-month period.
There is presently no requirement that tax is payable in another country for this exemption to apply. It is, therefore possible that, in certain circumstances, no tax is paid in any jurisdiction, in relation to periods worked outside SA.
National Treasury is of the view that this exemption is overly generous, particularly in instances where an individual has worked in a foreign jurisdiction with a low or zero personal income tax rate (i.e. so-called tax havens). As such, National Treasury has confirmed that, with effect from 01 March 2020, only the first R1 million of foreign service employment income will be exempt from tax. Income received over and above the R1 million threshold will be subject to tax, in SA, at marginal rates.
South African tax residents who are currently able to enjoy the benefit of paying little or no tax on their foreign employment income, will soon have to part with their cash to foot the additional tax bill. In instances where double taxation occurs (i.e. the same income being taxed twice in both the home country and a foreign jurisdiction) affected individuals may seek relief in one of two ways:
- through the application of a Double Taxation Agreement (“DTA”) where an individual seeks relief from paying tax, in SA, on foreign sourced income; or
- by claiming foreign tax credits in respect of taxes already paid , in the foreign jurisdiction, on the foreign sourced income.
The analysis of a DTA is fairly complex and generally requires the assistance of a tax professional. In addition, DTA relief can only be claimed through the submission of an individual’s ITR12 income tax return to SARS. Where there is no DTA between SA and a foreign jurisdiction, foreign tax credits may be claimed in order to prevent double taxation.
Foreign tax credits, like DTA relief, may only be claimed on the ITR12 tax return. Prior to the submission of the return, the individual is still obligated to pay all taxes due in both affected jurisdictions. It therefore follows that cash flow problems may occur. Furthermore, individuals claiming foreign tax credits must provide acceptable proof of foreign taxes paid to SARS. Such proof may be challenging to obtain and differing tax years (relating to different tax jurisdictions) adds another level of complexity to the calculation of foreign tax credits.
National Treasury, in collaboration with SARS, are working towards addressing these practical issues before the change becomes effective. RSM will be monitoring these developments closely.
In the interim, we encourage you to look out for Part 2 of this article in which we will provide useful examples demonstrating the true impact of this change on the pockets of the affected individuals.
Tax Compliance Consultant, Johannesburg