Tax adviser Jean du Toit, an attorney at Tax Consulting SA, said in a statement on Wednesday that the SA Revenue Service (Sars) may have shot itself in the foot by creating a tax loophole through a court judgment about how foreigners working in South Africa are taxed.
He said it seemed no one was working harder than Sars itself to create tax loopholes for expatriate employees.
“When is a Sars tax court case win a loss for the fiscus?” he asked.
He suggested the taxman would probably want to consider appealing its own recent legal win “to reset the well-established principles and balance of international and South African tax law applicable to foreigners working in South Africa”.
He explained that in March this year the Tax Court, Western Cape Division, delivered judgment in the matter of Mr X v the Commissioner for Sars.
“This dispute turned on the source of Mr X’s employment income, which he contended was where he physically rendered his employment services. Sars argued that it was located where Mr X had concluded his employment agreement and sought to tax him on his entire employment income on this basis.”
He said that although the judgment went against the individual in this case, and Sars had therefore won their case, it nevertheless opened the door to a major problem for the revenue collector on the flip side – because people with work agreements abroad may now find themselves fully exempt from paying tax in South Africa.
Last year, Sars proposed that it would repeal exemptions on foreign income and expect South African expats to pay tax in South Africa even if they were earning money abroad and paying the tax rates expected of them in those countries.
In the 2017 February budget, National Treasury proposed that South African tax residents working offshore for more than half the year and who paid no tax in those countries would have to pay tax in South Africa.
Then in the Draft Taxation Laws Amendment Bill published in July 2017, the proposal was broadened substantially.
The original budget proposal would have caught people who work in places such as Dubai where there is no income tax. The expanded proposal was intended to catch any South African tax resident earning money in any foreign jurisdiction anywhere in the world.
It supposed that it wouldn’t matter how much tax you paid in the other jurisdiction, there would be no exemption whatsoever. This meant a South African tax resident working abroad for more than 183 days a year (of which 60 were continuous) would in future be fully taxed in South Africa and only be eligible for a tax credit to the extent that tax was paid offshore.
The proposed amendment was to take effect on March 1 2019. South Africans working abroad were only likely to escape the proposed amendment if they were not tax residents in South Africa or deemed to be resident in a foreign country as a result of a double tax agreement.
Now Du Toit has pointed out that the Tax Court’s recent “bewildering judgment” suggests that foreign workers in South Africa may now be able to get away with not paying tax to the South African despite earning their income here – on the basis that their work contract was drawn up outside the country.
Du Toit said the judgment went “against the well-established legal principle embodied by Mr X’s argument and ruled that the source of employment income is where the employment agreement is implemented. Therefore, Mr X’s entire employment income was regarded as being fully taxable. This decision, however, has a delightful upshot for inbound expatriates with foreign employers, which is that they will be fully exempt from tax on income earned from services rendered in South Africa.”
He said that what was of great concern was “the fact that Sars presented an argument in court that defies a principle that Sars has accepted and confirmed by to be correct in its Guide on the Taxation of Foreigners Working in South Africa”.
He questioned why Sars would present an argument in court that was apparently in direct contradiction with “what is generally accepted as trite law and even spelled out in its own Guide?”
He wondered whether Sars had “quantified the loss to our fiscus of this policy decision?”
“Is SARS going to appeal this incorrect decision, or are they opening the door for foreign expatriates to now claim complete exemption from taxes based on a foreign employment agreement?”
He wrned that Tax Court judgments were of “persuasive value only, and do not constitute precedent”, so foreign workers in South Africa were advised to proceed with caution until Sars could clarify its position.
For full analysis of the case, read the extended article here.