This report covers South Africa’s private-sector foreign employment income tax exemption which will be capped at ZAR 1 million of foreign-earned remuneration per annum (effective 1 March 2020).
South Africa’s Taxation Laws Amendment Act, No. 17 of 2017, promulgated on 18 December 2017, contained the amendment, capping the private-sector foreign employment income tax exemption to ZAR 1 million foreign-earned remuneration per annum, as of 1 March 2020.1
This report explains how the capped exemption works, who will be affected, the process for claiming tax credits, and makes some observations.
The limitation could result in increased tax costs for employers and assignees alike. Where appropriate, adjustments to gross-up packages and withholding taxes need to be considered.
Currently, employers of South African tax resident assignees benefit from the exemption, in that:
South African tax residents are taxed on their worldwide income through the residence-based system. While DTTs exist to prevent double taxation under certain circumstances, a specific provision in the South African tax legislation provides a pre-emptive exemption, i.e., an exemption that statutorily limits South Africa’s taxing rights based on a set of criteria.
Many South African tax residents work abroad for a period during their working lives. Section 10(1)(o)(ii) of the Income Tax Act, No. 58 of 1962 (ITA) exempts employment income received by a South African tax resident during any year of assessment for services rendered outside South Africa for or on behalf of any employer, if that individual was outside South Africa for:
The exemption is only available to employees of private-sector companies.
There is currently no requirement that tax be payable in another country for this exemption to apply. As a result, it is possible that under certain circumstances no income tax will be paid anywhere by South African tax residents for periods worked outside of South Africa.
Furthermore, because the exemption is pre-emptive, individuals do not have to rely on DTTs or make use of the tax credit system to avoid double taxation.
According to National Treasury, the exemption of foreign employment income from the South African tax net appears excessively generous, particularly in instances where the individual worked in a foreign country with a low or zero personal income tax rate. National Treasury is of the view that the current exemption creates opportunities for double non-taxation and unequal tax treatment for South African residents employed by a national, provincial, or local sphere of government or any public or municipal entity (who do not qualify for the exemption).2
The amendment limits the exemption to only allow for the first ZAR 1 million of foreign remuneration to be exempt from tax in South Africa. The other requirements will still apply: the individual must be outside of the Republic for more than 183 days, as well as for a continuous period of longer than 60 days during a 12-month period.
The new exemption cap should not affect lower- to middle-class South African tax residents who are earning remuneration abroad. Relief from foreign taxes paid on the income earned for services rendered outside South Africa will be available under section 6quat of the ITA, to the extent that a DTT does not convey exclusive taxing rights.
The National Treasury has made the amendment effective from 1 March 2020, to allow time for individuals (and employers) to either adjust their contracts or their circumstances, and to finalise or formalise their tax status.
What Will the Impact Be?
What about Double Taxation Treaties?
Particular Areas of Concern
At present, further industry discussions are being held to collate data on:
Timelines: The legislative cycle runs from the November of the prior year for any legislative amendments to be promulgated each year. Therefore, in order to effectively support a possible change to the capped exemption, the information substantiating such a change would have to be made available to the National Treasury by November 2018 at the latest.
Should affected parties wish to analyse the potential effect of the capped exemption on their business, they should consult with their qualified tax professionals.
Furthermore, the KPMG International member firm in South Africa would welcome any parties that would be able to share their statistics with National Treasury with a view to supporting a review of the capped exemption.
1 Taxation Laws Amendment Act, No. 27 of 2017. The TLAA can be found on the National Treasury (www.treasury.gov.za) and SARS (www.sars.gov.za) websites.
2 Budget Review 2017, Annexure C, p. 138; Explanatory Memorandum on the Taxation Laws Amendment Bill, 2017, (15 December 2017), p. 6.
3 Under tax protection, the employer generally reimburses an assignee for the excess taxes incurred while on international assignment. The assignee usually bears responsibility for paying all actual taxes in the home and host countries. The annual tax protection calculation compares the “stay-at-home” or “hypothetical” tax to the actual worldwide taxes paid by the assignee. The employer reimburses any excess to the assignee. Tax protection policies generally put the burden of filing and paying home and host country taxes on the assignee. Any benefit from the payment of less tax than the stay-at-home position is retained by the assignee.
4 The objective of tax equalisation is to make sure that assignees do not have a higher or lower income tax liability than if they had remained in their home country. Therefore, they will receive a net amount of remuneration as if they had remained in their home country (i.e., their packages are recalculated with reference to the tax that they would have paid, had they remained in their home countries – so that all assignment-related benefits are paid tax-free, over and above this net package entitlement). The employer usually bears the responsibility of paying the assignee’s actual taxes in the home and host countries.
ZAR 1 = EUR 0.09678
ZAR 1 = USD 0.0843
ZAR 1 = INR 5.36
ZAR 1 = GBP 0.0594
The information contained in this newsletter was submitted by the KPMG International member firm in South Africa.
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