With many South African tax residents working abroad, recent changes to tax law on foreign employment income may see many taxpayer’s affairs increase in complexity and potentially, incur an additional tax charge.
The amendments to Section 10(1)(o)(ii) should be reviewed by individuals who have left South Africa to work overseas, are undertaking frequent business travel outside the country, and employers with internationally mobile employee populations. For multinationals with tax equalised employees, the tax cost of international assignments may increase from 2020 with the changes to the current exemption.
South Africa introduced a tax residence-based tax system with effect from 1 March 2001 meaning that South African tax residents are subject to tax on their worldwide income.
Individuals working outside South Africa have been able to rely on both domestic tax law and Double Taxation Agreements (DTAs) to prevent double taxation under certain conditions. Under South African tax law, Section 10(1)(o)(ii) provided an exemption that that prevents employment income being taxed both in South Africa and a foreign country where the individual is working, provided that certain conditions were met.
In the 2017 Budget Review, the National Treasury proposed that the exemption should be repealed on the basis it was deemed too generous to individuals and may generate fiscal loss to the government. The final proposal has not resulted in the total abolition of the exemption but does reduce its original scope.
Current application of Section 10(1)(o)(ii)
The section 10(1)(o)(ii) exemption currently allows for a South African tax resident’s employment income that relates to services physically rendered outside of South Africa to be exempt from tax provided the individual is rendering services for or on behalf of their employer outside South Africa:
For a period exceeding 183 full calendar days, in aggregate, during any period of 12 months (commencing or ending during a year of assessment)
In the same 12-month period, must be outside South Africa for a continuous period exceeding 60 full calendar days.
Where an individual qualifies for the exemption, all remuneration earned in relation to the foreign employment duties will be exempt from tax in South Africa.
Future application of Section 10(1)(o)(ii) and double taxation mechanisms
Effective from 1 March 2020 (2021 South African tax year), the Section 10(1)(o)(ii) exemption will be limited to ZAR 1 million for the year of assessment.
For individuals whose income exceeds this threshold, further relief may be available on income more than ZAR 1 million (approximately USD 72,250) are as follows:
Relief under a DTA where the taxpayer may not be taxable in South Africa on certain foreign-sourced income
Claiming a foreign tax credit in respect of taxes paid in the foreign country on their foreign sourced income also subject to South African tax.
Where there is no DTA in place (or the DTA does not grant exclusive taxing rights to one of the states), South African tax residents will look to claim foreign tax credits. Taxpayers in low or no tax locations, such as Singapore and Dubai, may, however, find they will have residual South African tax liabilities from 2020.
We hope that the information outlined in this update will help you navigate the changing rules. Claiming foreign tax credits can be complex and taxpayers will need to understand the implications and potential future exposure. If you would like to discuss in further detail, please get in touch with Veli Ntombela.