Part 1: How foreign employment income tax will impact South African expats
Financial Emigration (FE) is exactly what it says, it is a financial status change that one can elect to undergo, provided you have left SA to take up or have been granted a permanent residence permit, outside the CMA [Common Monetary Area, being SA, Namibia, Lesotho and Swaziland).
It is correct that the SARB financial process is subject to filing a tax emigration clearance to confirm a good tax standing, that all returns were filed, and all taxes are paid or provided for on departure.
Recently a Fin24 article quoted Claudia Aires Apicella, head of financial emigration at Tax Consulting SA, suggesting that Apicella and Tax Consulting SA is of the opinion that:
“When one “emigrates financially”, however, they cease to be a South African tax resident and will not be liable to pay any South African tax on their worldwide income. They will, however, be required to declare any South African sourced income which may be taxable, such as rental income.”
FE is not a tax emigration requirement,
nor does it trigger or guarantee tax emigration or non-resident tax status. Product providers or FE specialist, now
promoting FE at all cost or as the ultimate solution to escape the new #Tax2020
rules, are misleading taxpayers.
Yes, the minute your chosen
adviser suggests FE is NOT an option, it is a pre-requisite or a way to tax emigrate, be scared, be very scared and
obtain a second opinion from a tax
specialist not earning his fees from the FE process.
What then is the best solution or
option available to taxpayers?
There is no one single solution
for all. The answer is in client-specific
tax profiling and the following tax issues and profiles, were identified during
the past years:
Expats with no tax-exempt amounts
It is of great concern, having seen how many expats South Africans, not having tax emigrated (i.e. they are tax resident or deemed to be tax resident) incorrectly believe they have been and will continue to enjoy a tax exemption on their foreign income.
The act is rather clear, and Interpretation Note 16 (Issue 2) [IN16] stipulates that the exemption is limited to remuneration from foreign employment, while passive and business income remains fully taxable for as long as one is tax resident in SA.
- Passive income and independent contract income, does not qualify for to the 183/+60-day exemption; whereas
- Leave days, albeit spent in SA, may qualify for exempt days to determine the proportional exemption, provided the more than 183 days were achieved.
Tax treaty protection
Most expats live and work within a country where a tax treaty may indeed protect them, provided they have tax emigrated from South Africa.
Tax emigrated expats
Many expats tax emigrated some years back, yet they have failed to notify SARS and more importantly, failed to pay the exit tax. Their tax exposure, penalty and interest liability now faced may indeed have a bigger cashflow impact than the new #Tax2020 rules.
Payroll tax at source
Working in a country that does not tax you on worldwide income, yet they tax you on the local income from employment. These tax systems rely on the source-based tax rules to collect tax against immigrant or guest employee, yet most taxpayers did not even know their employers paid the source tax on their behalf. Taxpayers are advised to ask their employers about the taxes they paid on their behalf, as SARS will allow a tax credit for said local taxes. This rule applies to both treaty and non-treaty countries.
There are indeed a small number of expats that do not have any option but to adjust their lifestyle as they will need to adjust their new after-tax net income, as of 1 March 2020. For them #Tax2020 is painful. One such a class of taxpayers are so-called independent contractors.
- Independent contractors do not earn “remuneration” and as a rule, do not qualify for the exemption. A person must, therefore, be an employee earning remuneration to qualify for the exemption.
- Contract workers must be under contract and outside SA for more than 183 days while under contract. Unemployed periods spent outside SA does not count, whereas rest periods between rotational shifts (oil rig workers) do qualify as its leave periods. Contract workers are not providing a service during the period between contracts, normally fails the days’ test, because both the service as an employee and the physical presence test must be complied with to ensure the relevant tax exemption.
Officers and crew on a ship
There is a separate set of rules addressing the tax exemption of natural persons employed on a ship. There is indeed a separate Interpretation Note 34, dealing with employees on the water. Employees on the ship, not involved in the passage or navigation of the shop (mining and exploration staff, as well as operators of the onboard shops) will have to apply the rules as set out in Interpretation Note 16 (Issue 2). The main differences between Interpretation Note 16 and 34 are:
- The 183 days for crew and officers are determined with reference to a tax year, whereas the other foreign workers test their days outside in any twelve months; and
- The 60-days continuous and uninterrupted day rule to qualify which does not apply to crew and officers on a ship transporting persons for reward, and
- Ship crew and officers will not be subject to proportional tax on the days spent within SA, whereas an employee qualifying under the 183/+60 day rule (Interpretation Note 16 (issue 2)) will have to pay SA tax on the days employed in SA, i.e. they only enjoy a proportional exemption
; andmost importantly
- The crew and officers are qualifying for the exemption as explained in Interpretation Note 34, will not be subject to the R1m exemption cap.
SARS guidelines issued to date
Sadly, one year after the promulgation of the new act, and just one year away from implementation and SARS has issued no new or revised guidelines. Interpretation Note 16 (issue 2) was in the making for near 18 months, and the general 2018 tax guide was only issued 11 days before the 2018 tax filing deadline. SARS is notoriously slow in updating their guides and interpretation notes. It is also of great concern that they have not even issued Interpretation Note 16, draft issue 3 for comment by taxpayers and the industry.
Hopefully, SARS will soon issue Interpretation Note 16’s 3 version and even consider updating Interpretation Note 34.
Part 2 of a 3-part series on the limitation of foreign employment income exemption.