Many skilled South Africans have accepted employment opportunities in foreign countries for lengthy periods such as for most of the year or even for several years continuously, and so legally avoided paying tax in South Africa. SARS has always treated these people as “non SA residents for taxpaying purposes”. SA adopted a “residency-based” income-tax system on 1st March 2001 and this basically means that a person pays income tax in the country where they live and work for most of the year. If a SA citizen lives and works in a foreign country with a DTA, such as the UK for example, for most of the year then they should be treated as a UK taxpayer and pay income tax in the UK. This also means that if they spend most of the year living and working in a country where there is no personal income tax, such as Saudi Arabia for example, then they pay no income tax in Saudi Arabia and no tax in SA so they pay no income tax at all.
SARS has now changed the tax laws in SA (Taxation Laws Amendment Bill Dec 2017) and SA citizens working overseas will pay income tax on a portion of their offshore earnings to SARS. This is now law and the law will come into effect on 01/03/2020 which gives those affected time to arrange their working schedules.
If there is a DTA in place, the first R1m of salary/income earned offshore will be exempt from tax and SARS’s normal tax rates will apply to the balance of income earned. This means that, if a person earns R1,100,000 in foreign salary/income then the first R1m will be exempt from tax in SA and SARS will tax them on the R100,000 balance.
There is no distinction between salary/income earned in foreign countries where tax is deducted and foreign countries where no tax is deducted. This means that if R1.1m salary was earned offshore and R300K tax was deducted offshore then SARS would say that R300K in tax was deducted offshore on what SARS sees as R100K income (because R1m of the R1.1m is exempt). In terms of s6quat and using current tax rates, SARS would say that, if the R100,000 was earned locally then only R18K would have been deducted locally so you can only claim R18K of the R300K taxes deducted offshore on your tax return as allowable taxes already paid. Many people working in foreign countries enjoy fringe benefits such as accommodation, the occasional free flights home etc, as part of their contracts, and SARS sees all these benefits as part of taxable foreign earnings. If a SA citizen works in Saudi Arabia for a year and earns R2m then no income tax is deducted in Saudi Arabia. SARS will exempt R1m of the income and SARS will levy over R300,000 in income-tax on the R1m balance of the foreign income earned (using the current 2019 tax tables in this example).
To avoid this situation, taxpayers will have to consider emigrating financially and not merely ‘relocating’. Merely re-locating to a foreign country for a time and keeping your SA passport is not good enough. We all live in the same “global village” where everything is interconnected. Financial institutions all over the world are linked to tax regimes in all countries and SARS will find you unless you have officially emigrated. If you have a bank account opened in a foreign country using your SA passport then SARS will have access to that bank account’s transaction records. Tax regimes around the world work together. SA banks have to provide Revenue Canada, for example, with transaction records of accounts in SA held by Canadian passport holders.
Because this new law only comes into effect on 01/03/2020, there is still a small chance that minor amendments could be made before then but tax practitioners and financial consultants should advise their clients accordingly if this new law applies to any of their clients.
WinTax will cater for all these new changes as soon as they happen.