Some thoughts on the proposed repeal of foreign employment has been saved
Some thoughts on the proposed repeal of foreign employment
2018/19 South African National Budget Expectations
Last year saw the promulgation of the Taxation Laws Amendment Act, which will limit the application of section 10(1)(o)(ii) of the Income Tax Act, No 58 of 1962. This section exempts from South African tax any remuneration earned for services actually rendered outside South Africa if the person spends more than 183 full days (including a continuous period of more than 60 full days) outside South Africa in any twelve-month period during which the services were rendered outside South Africa.
However, with effect from 1 March 2020, only the first R1 million of foreign remuneration earned in a tax year would be exempt from South African tax if the requirements of section 10(1)(o)(ii) are met.
Although National Treasury sees this as a compromise position, some questions remain around the financial impact of the change and how it will work from a practical perspective, specifically problems to claim a foreign tax credit (FTC) and the cash-flow issues on SA payrolls where the foreign remuneration exemption is not met.
There is currently no consistent approach by SARS regarding the required documentation for an individual to claim an FTC. However, it can be anticipated that, where tax is withheld at source in a foreign jurisdiction, SARS may insist on copies of certificates of tax withheld or copies of receipt from the foreign country. Alternatively, if no tax is withheld at source, a copy of the statement of account or assessment may be required. This poses an administrative issue, as some countries (e.g. Ghana) do not require a tax return for non-residents where tax is withheld at payroll level and no receipts for payroll taxed are available.
In addition, where an individual is subject to PAYE withholding on their remuneration both in South Africa (due to the impact of the amendment) and in the country where the services are rendered, the concurrent tax withholding may lead to adverse cash-flow consequences since a FTC cannot automatically be taken into account on the South African payroll. Currently, the only way to alleviate the cash-flow issue is to obtain a hardship directive from SARS to request relief from South African PAYE to the extent that a rebate in respect of the foreign taxes paid on that remuneration is available. In the absence of such a directive, the FTC can only be taken into account on assessment of the individual's annual income tax return.
Apart from these administrative concerns, there may be an increased tax cost to an individual earning more than R1 million depending on the applicable tax rates in South Africa and the country where the individual renders their services.
For example, if an individual is on assignment to the United Arab Emirates (UAE), where no individual taxes are applicable on remuneration, the full foreign remuneration will be taxable in South Africa and no FTC is available. On the other hand, where an individual earns R2million or less per annum in foreign remuneration and the effective tax rate in the other country is above 16% there will be no resultant South African tax liability after the change to the legislation. For a person earning R3 million per annum, such ‘break-even point’ will be for countries where the effective tax rate on that remuneration is at least 25%.
Although it would seem that the remuneration levels referred to above could be at the higher end of remuneration scales, it should be noted that certain assignment related benefits, specifically tax equalisation, would artificially inflate remuneration without any real economic benefit to the assignee. However, with such benefits becoming taxable in SA, the overall assignment cost to the assignee’s employer would increase, as such additional costs would be borne by the employer.
Although the concerns raised above may not be addressed in the current budget, various stakeholders will continue to raise them as the effective date draws closer.