Working overseas could become much less lucrative

A proposal to tax South African tax residents who work in countries with favourable tax jurisdictions like Dubai, Qatar and the Cayman Islands for more than 183 days a year and who currently don’t pay tax in these jurisdictions or in South Africa is fair and will bring South Africa in line with its peers, National Treasury says.

The proposal to amend the exemption on foreign employment income was mooted during the Budget, but has been met with criticism from some commentators who argue that it is unfair to expect individuals to pay tax in South Africa if they are absent from the country and don’t receive any local services.

Currently, if a South African tax resident works in a foreign country for more than 183 days a year, employment income earned in respect of those foreign services is exempt from tax in South Africa, subject to certain conditions. The exemption is available to employees of private-sector companies.

Treasury has proposed that the exemption be amended so that foreign employment income will only be exempt in South Africa if it is subject to tax in the foreign country.

Christopher Axelson, director for personal income taxes and saving at National Treasury, says it is trying to implement the residence-based principle of taxation in a more comprehensive manner.

A number of countries – for example the UK, Australia and Canada – tax residents that work overseas on their worldwide income. If they work in another jurisdiction where they are not taxed and there are no adjustments in terms of double tax agreements, the income has to be declared and tax paid in their home country.

“In our view we are an outlier in this area by not taxing individuals on their worldwide income and in effect we are just trying to align. We think it is not quite fair if there are individuals working and living in a global system where they are not actually paying tax anywhere,” Axelson says.

Working internationally for a year or two has been a popular way for many South Africans to pay off student debts, save for a property or supplement their retirement income. If the proposal is introduced, the financial benefits of such steps could be reduced substantially, depending on the tax jurisdiction and the double taxation agreement applicable.

Charles de Wet, Tax Partner at PwC, says the proposal would typically affect individuals who are seconded to an international company within the group and where no tax is paid in South Africa or the foreign jurisdiction.

The real problem with the current exemption, as perceived by Sars, is that some people have deliberately worked outside South Africa for 184 days a year in jurisdictions where no tax is payable and as a result their foreign salaries have been fully exempt from taxation, adds Tertius Troost, tax consultant at Mazars.

South Africans working in established jurisdictions like the US, England or Ireland, likely won’t be affected by the proposal because they will in any event be paying tax in these countries, De Wet says.

However, if the proposal finds its way into our law, a South African tax resident who works in Dubai and who earns more than R1.5 million per annum, will be taxed at a marginal rate of 45%, which would make the opportunity much less attractive financially.

De Wet says while the proposal is not unusual, the implementation thereof will not be as simple as it sounds. Double tax agreements will also have to be taken into account.

Ultimately, the proposal is unlikely to be a significant money-spinner for government if it is introduced, he says.

Since the proposal is still to be drafted into legislation for public input, Troost does not want to speculate about a potential implementation date, but says the most pressing issue is whether it will be applied retrospectively.

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