[South Africa] Changes to taxes on foreign employed residents

Tax residents are taxed on their worldwide income, as a rule, but now a specific exemption has been made for foreign employed residents working extended periods outside South Africa, Moneyweb reports.

Under Section 10(1)(o)(ii) there is a provision exempting employees who spend more than 183 full days outside South Africa in any 12-month period during which time they carry out work. This 183 days must include a continuous 60 full days.

Most foreign countries tax the employment income of workers earning from employment in their country on a PAYE-type system. This exemption provides relief from paying double tax - in the country of employment as well as in SA - to South African tax residents. The 183 day and 60 continuous days rule exempt SA residents from tax liability on the same income in SA, their country of residence.

Many individuals work in countries where the working income of foreign nationals is not subject to tax. These individuals have to pay no tax on their employment income, either in SA or in the foreign country where the services are rendered. This results in double non-taxation, going against the aim of the exemption; to provide relief against double taxation of the same income.

To end the double non-taxation of income earned from foreign employment, the section has been amended. The Taxation Laws Amendment Act of 2017 comes into effect from March 1, 2020.

Under the revised proposal the section has not been totally repealed, instead, the section continues to allow the first R1million of foreign earnings to stay exempt from tax in South Africa if the worker follows the requirements of section 10(1)(o)(ii) in relation to the money earned.

The result is that for a worker earning in excess of R1million from foreign services, the amount exceeding R1million count towards their South African taxable income and be taxed at the appropriate personal income tax rate.

This exemption applies to workers who remain tax residents of South Africa despite working outside the country.

Practical implications for South African residents

  • If a worker in foreign employment earns more than R1 million, in a country where they have not been paying tax on earnings from those services, they are likely to owe tax on this income in SA

  • If a worker in foreign employment earns more than R1 million, in a country where they have been paying a lower amount of tax on their earnings than they would have paid in SA, they are likely to owe tax on the difference in SA

  • If that individual was already paying the same (or more) employees’ tax in the country where the services were rendered, and now becomes liable for tax in SA, the outcome might be double taxation

  • Where double taxation occurs because the individual is already paying tax in the country where the services are being performed, relief in terms of the foreign tax credit sections of the Income Tax Act or the application of a DTA are likely to be available

  • If a worker is eligible for foreign tax credit or relief under a DTA, a directive would need to be obtained from the South African Revenue Service (Sars) to request relief from SA tax to the extent that a rebate in respect of the foreign taxes paid on earnings is available

  • In such cases, workers must take advice on how to apply for these directives and understand whether these must be applied for annually

The change only affects workers who are South African tax residents. From a tax perspective, many South African nationals working abroad are already non-resident from a tax perspective. They will not be affected. Though these individuals may need to give evidence proving this to

South African nationals working abroad should get professional advice to help them plan and assess the impact these new rules may have on their future tax liability. As the rules vary, specific advice on a worker’s personal situation should be taken. Many South Africans could be in a better situation than they believe they are.

There is time before March 2020 to make sure that relief from any potential double taxation has been arranged with Sars.