e-taxline Alert

Foreign employment income exemption

James Hourigan James Hourigan

Foreign earned employment income exemption proposed repeal

South African tax resident taxpayers are subject to tax on worldwide income and capital gains. However, an exemption from tax applies in respect of employment income attributable to services rendered outside South Africa, subject to the employee satisfying certain qualifying criteria.

This involves the employee being required to be outside the country in the rendering of his employment duties, for more than 183 full days in total during a consecutive 12 month period and for a continuous period of more than 60 full days during that same 12 month period.

One of the tax proposals arising out of Budget 2017 was to continue to afford this relief to an employee only to the extent such an employee paid tax in the foreign country in which they were working. Treasury highlighted its concern that otherwise this would result in the employee not paying tax in either country.

Despite lobbying from certain quarters for the foreign earned employment income exemption (the exemption) to continue in its current form, rather controversially, the Draft Taxation Laws Amendment Bill, which issued for public comment on 19 July 2017, goes a step further, in that it contains a provision to repeal the exemption entirely. If implemented, the exemption will be repealed effective from 1 March 2019 onwards.

Treasury has stated that the exemption creates opportunities for double non-taxation of employment earnings where no tax is imposed in the foreign country or countries in which the employee works. It also advises that the repeal of the exemption will ensure equal tax treatment for public and private sector South African tax resident employees who work overseas.

However, any repeal of the exemption will likely result in employers in the private sector facing significant difficulties in mobilising their employee workforce to work on foreign based projects. This could result in significant loss of revenue for such employers. At the very least, it could result in unbudgeted increased labour costs and additional administrative obligations for these employers.

While the employee would be able to claim a credit for the tax payable in the host country when calculating the net South African tax liability in respect of their employment income, it may also trigger cash flow difficulties for employers and/or employees. By way of example, repeal of the exemption could result in employees' tax being payable simultaneously in South Africa and the host country.

Should the exemption be repealed, it will be interesting to see what additional revenues it will raise for the fiscus. In this regard, any removal of the exemption could potentially lead to an increase in South African resident taxpayers migrating their tax residence overseas. Breaking South African tax residence could potentially result in individuals avoiding any South African tax liability in respect of their employment income, and indeed other income and gains, depending on the circumstances. This could occur where the individual formally emigrates from South Africa and is no longer considered to be a resident for tax purposes. It may also occur where an individual is seconded to work in a foreign country on behalf of an employer.

For example, whilst still considered a tax resident in South Africa under either the ordinary residence or physical presence tests, the individual could be deemed to be a tax resident in the foreign country under its tax laws and under the residence article of the double taxation agreement that South Africa has with that foreign country. There is, of course, a potential sting in the tail in the form of the Capital Gains Tax (CGT) exit charge that may apply to those who break South African tax residence. However, this may prove to be a price worth paying for many taxpayers. It is noted that the latest tax return (2016/17 tax year) for individual taxpayers now contains a specific section dealing with non-residence and the CGT exit charge.

Much lobbying is expected to take place in support of the foreign earned employment income exemption being retained. In its deliberations, it is hoped that Treasury will take cognisance of the various challenges employers are likely to face should the proposed repeal be implemented.

For more information on the Draft Taxation Laws Amendment Bill and how this may affect you, please contact us.

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