South African resident taxpayers are subject to tax on worldwide income. However, an exemption from a charge to tax applies in respect of employment income earned in respect of services rendered outside the Republic subject to the employee satisfying certain qualifying criteria. This involves the employee being required to be outside the Republic for more than 183 full days in the aggregate during a consecutive 12 month period and for a continuous period of more than 60 full days during such period of 12 months, when such foreign services were rendered during such periods worked outside the Republic.
In this instance, the resident taxpayer will continue to be subject to tax on employment income attributable to services physically rendered in South Africa.
One of the tax proposals arising out of Budget 2017 is to continue to afford this relief to an employee only to the extent such employee has paid tax in the foreign country in which he or she is rendering the services. Treasury highlighted its concern that otherwise this would result in the employee not paying tax in any country in respect of the employment income attributable to the foreign services.
On the face of it, it makes absolute sense that the employee in question should pay his or her fair share of tax, whether that is in South Africa or in the foreign jurisdiction where he or she is performing the services.
Indeed, where the employee is assigned to work in one particular country on behalf of his or her employer for more than 183 days, typically that employee will be liable to tax in that country in respect of his or her employment income attributable to services rendered in that country.
So one might ask, what is the problem?
In reality, due to work demands, an employee could be obliged to work in more than country and indeed in some cases multiple jurisdictions over a period of 12 months or longer.
In this instance, through no fault of the employer or employee, the tax laws of the particular foreign jurisdiction(s) may result in the employee not being liable to pay tax in respect of his or her employment income in such jurisdiction(s).
It is quite common for such employee to be working, for example, on construction or mining related projects in remote areas in a foreign jurisdiction. Typically, the employee lives in very basic accommodation and is away from his or her family for lengthy periods of time.
The employer will often agree to allow the employee enjoy the benefit of the foreign earned employment income exemption highlighted above, where the qualifying criteria is satisfied. Aside from helping ease the hardship for such employee and his or her family, employers otherwise typically find it very difficult to encourage its workforce to work on such foreign based projects.
A potential unintended consequence of the proposed change to the above-mentioned employment income exemption, is that employers could now face significant difficulties in mobilising its employee workforce to work on these foreign based projects. This could result in significant lost revenues for such employers. At the very least, it could result in unbudgeted, increased labour costs and administrative obligations for such employers.
It is hoped that Treasury will take in to account such challenges for employers prior to making any changes to the foreign earned employment income exemption.