Just to recap – from 2001 South Africa adopted a residency based tax system, however, an exemption was granted in terms of section 10(1)(o)(ii) of the Income Tax Act in respect of foreign income. In terms of this section, if a South African resident rendered services for and on behalf of their employer, outside of South Africa for an aggregate of 183 days during any 12-month period and for a continuous period exceeding 60 days, such foreign remuneration would not be subject to South African taxes.
On 19 July 2017, the Treasury proposed that foreign income would be subject to South African taxes with effect from 1 March 2019. Cognisance must be taken of the fact that these changes were contained in draft legislation which invited public comment before 18 August 2017; one can expect vociferous opposition to the proposal from a myriad of industry sources.
Treasury’s motivation for the proposal was the following – “ When the section 10(1)(o)(ii) exemption was introduced in 2001, the main purpose of this exemption was to prevent double taxation of the same employment income between South Africa and the foreign host country. Also, during that time, South Africa had a more limited number of Double Tax Agreements to assist with the prevention of double taxation. This exemption was never intended to create situations where employment income is neither taxed in South Africa nor in the foreign host country.”
- The mooted changes have serious implications and repercussions for South African tax residents living in low tax jurisdictions. For example, the marginal tax rate (applying the standard rate) in Hong Kong is 15% and Singapore 22%. In Africa, the average marginal tax rate is 33% which is significantly lower than South Africa’s 45%. South African tax residents in the following African countries will be severely affected – Mauritius 15%, Angola 17% and Nigeria 24%. Of course, those currently working in the UAE or other Middle Eastern countries which are zero tax territories, will be most affected.
- SARS will need to develop mechanisms to manage and control the collection. One could prudently expect an administration morass, numerous requests for additional documentary proof and delays with refunds, if applicable.
- The payment frequency of the South African taxes has not been specified or determined. In all likelihood, Expats will have to register as provisional tax payers where tax payments are made in three instalments. In this case, half the estimated South African taxes must be paid by 31 August each year; the Expat would thus pay the South Africa taxes on the foreign remuneration six monthly.
- There may well be a difference in the tax treatment of Fringe Benefit Tax between the resident or host country and South Africa. For example, a housing benefit in the host country may not be taxed (or taxed at a favourable rate) whereas, in South Africa, the benefit would be fully taxed. This different tax treatment would result in higher taxes being paid by the expats and perhaps most importantly, would require a comprehensive South African tax calculation – it would not be as simple as many commentators have stated that the amount due, is simply the foreign tax rate less the applicable South African tax rate which is due to SARS.
The additional cost of paying taxes on foreign remuneration may force such tax payers to emigrate from South Africa for tax residency purposes. This would be pertinent to younger tax payers who anticipate that they will continue to work overseas for several years. Calculations would have to be done to quantify the break-even between paying the exit tax and the continued payment of South African taxes.
Does Treasury care? Probably not. They are currently not receiving any taxes from the tax payer and will receive the exit tax if emigration is chosen. Further, when they return to South Africa, they will commence paying taxes again.
In most expat package calculations, the presumption is that the expat or foreign worker will not be worse off or disadvantaged by the move to the foreign country. The draft proposals demonstrate a lack of understanding of the following factors:
- The cost of living (“COL”) is higher in many countries than South Africa. This includes “large ticket” items such as housing, schooling and health care costs. The host country salary will be increased to recognise these expenditure items.
- Several countries have relatively high social security costs. The Expat will not retire in the host country, and the costs of such items are often built into the package or paid by the employer. They do not constitute remuneration or fringe benefits but may be taxable in South Africa.
- Concomitantly, companies with operations in Africa, some international countries and especially the Middle East, will incur higher salary costs when employing South Africans.
Let’s examine the extreme example of a South African employee working in Dubai. They currently pay no tax, and with effect from 1 March 2019, their Dubai income will attract South African tax at 45%; assuming they are subject to the marginal tax bracket. Cognisance must be taken of the fact that Dubai is significantly more expensive than Johannesburg – most COL data calculates that Dubai is 100% (double) more expensive than Johannesburg; with rent being almost 2.5 times higher. Their Dubai salary is significantly higher than they would earn in South Africa because of the higher COL. However, they will be required to pay South African tax on the higher remuneration with no recognition or deduction for the significantly higher living expenses. This is short-sighted and demonstrates a complete lack of understanding on the part of authorities; unless of course once petitions are made, Treasury will agree to a COL and housing adjustment as a “concession”, and stakeholders will feel that they have achieved some compromise.
As it stands now in terms of the draft legislation, the Expat’s disposable income will reduce by 45%.
One could contend that they have previously received an unfair “tax break” or windfall. However, one must acknowledge that most countries (except for the United States) do not tax Expats working abroad. Treasury has therefore effectively, with the swipe of a pen, made South Africans uncompetitive in the international labour market. The fact that tax payers currently can work offshore, gain international experience and transport that international know-how and expertise back to South Africa to enhance the local economy, appears lost on Treasury.
Many South Africans have limited options. They can:
- Attempt to re-negotiate their package which will be difficult in the current global economic environment; OR
- Resign and return to South Africa with the resultant inevitable increase in unemployment.
The draft legislation does have serious consequences for both South African foreign workers and companies employing them abroad. We must recognise that the published legislation is a draft and that intense lobbying will occur.
Despite this, planning and analysis should be done now so that an adroit action plan can be implemented before 1 March 2019.