Working abroad – South Africa set to tax your global income

It has been reported that there is a plan to scrap tax exemption on income earned outside SA. Treasury has controversially proposed removing the foreign employment income tax exemption for South African residents working abroad, from March 1 2019. It is contained in the Draft Taxation Laws Amendment Bill of 2017, which was released Wednesday for public comment, together with the Draft Tax Administration Laws Amendment Bill.

Treasury stated that it applied to work done outside the country for more than 183 days – under 183 days is already taxable. She said the exemption was introduced to alleviate the tax burden on employees, but Treasury had found there were situations in which no income tax was paid in SA or in the foreign country. In some cases no income tax is paid.

The withdrawal of the exemption would mean that tax would be paid on worldwide income in SA, whatever the length of time worked abroad, though tax credits would be recognised for foreign taxes paid.

The targeted implementation date is March 1 2019.

Under the current laws, if a tax resident works in a foreign country (outside of South Africa) for more than 183 days per year, the income earned from employment in that country during this period will be exempt from tax in South Africa. Removing the exemption would mean that tax would be paid on worldwide income in SA, whatever the length of time worked abroad, though tax credits would be recognised for any foreign taxes paid.

Tax proposal on foreign income a blow for expats:

THE news that amendments to the tax laws will remove the income tax exemption on South Africans working overseas has come as a blow to expatriates and their employers. Even if the amendments are implemented in their current form, there are some measures expats may be able to take to avoid paying full tax as if they were working in South Africa, and even paying double tax – both to the South African Revenue Service (Sars) and to the country in which they are working.

Currently, under section 10 of the Income Tax Act, expats working abroad can claim an exemption on their income, effectively paying income tax only to the country in which they are employed.

The draft amendment law will repeal this exemption completely, which means that income South Africans earn overseas will become fully taxable, and the only relief that may be claimed will be for foreign taxes paid. For example, if you are on a marginal tax rate of 45% and are taxed at a rate of 25% in a foreign country, SARS will collect the difference of 20%.

One option is to emigrate properly, but this will trigger capital gains tax, because you will be deemed to have disposed of your assets, he says.

Mike Abbott says the amendments will not apply to all South Africans who work abroad.

“In terms of the residence-based system of taxation, South African residents are taxed on their worldwide income. If a resident works in a foreign country for more than 183 days with no tax payable in the foreign country, that foreign employment income will benefit from double non-taxation.

“Section 10 of the Income Tax Act exempts income for services rendered outside South Africa for periods exceeding 183 days in a 12-month period, of which at least 60 must be consecutive. This relates only to employment income and not other types of income. It is also not applicable to self-employed people or sub-contractors,” Abbott says.

He says expats may escape the effects of the amendments if:

• They are not deemed to be ordinarily resident in South Africa (in other words, not a South African tax resident); and

• They are deemed to be resident in their foreign country by virtue of the provisions of a double-taxation agreement.

The onus is on the taxpayer to prove this, he says.

We are also keeping an eye on a proposed amendment, also published in February 201 (though undated) re crew and skippers on SA boats, that seems to be heading in the opposite direction to the entire approach described above! It is tedious, but see: https://goo.gl/7qTQnu or http://www.sars.gov.za/AllDocs/LegalDoclib/Drafts/LAPD-LPrep-Draft-2017-04%20-%20Draft%20IN%20on%20exemption%20from%20income%20tax%20remuneration%20derived%20by%20officer%20or%20crew%20member.pdf

Credits and references:

https://goo.gl/DKqBKC

https://goo.gl/RSJa29

https://goo.gl/tmuR41