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South African Expat Tax Amendment Countdown Begins

Compiled by Carin Smith.

An amendment to the Income Tax Act will bring considerable change to the expat landscape as from March 1, 2020.

Jean du Toit and Jonty Leon are the technical editors of the publication “Expatriate Tax – South African Citizens Working Abroad and Foreigners in South Africa”.

Amendments to the Income Tax Act are due to come into effect from March and, among other things, South Africans working overseas will only be exempt from paying tax on the first R1m they earn elsewhere.

The exemption was discussed in the 2019 Budget Review and has been the subject of some controversy in South Africa, Fin24 previously reported.

Du Toit and Leon say that in the 2017 Taxation Laws Amendment Bill, it was announced by National Treasury that the expat exemption would be repealed in its entirety – meaning that the totality of an expat’s income earned abroad would be subject to tax in South Africa.

“This perturbed the expat community, their employers and other stakeholders.

“Following presentations to the Parliamentary Standing Committee on Finance and many submissions and workshops later, expats were begrudgingly handed a R1 million per annum exemption, and an extension to the effective date of the amendment to March 1, 2020,” explains Du Toit.

“It must be understood that expats’ entire remuneration will be taken into account. What this means is that, if they remain tax resident, they will be taxed fully on any allowances and benefits, as if they were just a normal employee working in South Africa.”

Leon foresees that the R1 million exemption will, in some case, likely be exhausted “somewhat rapidly”.

This will especially be the case where the employer pays for “benefits” such as security costs or drivers, international school fees, medical insurance or housing, even though these may not provide any economic benefit to the expat.

One of the unforeseen consequences, in the view of Du Toit, could be that expats may simply decide to sever their ties with South Africa and cease their tax residency.

“Unfortunately, the solutions for the expat in relation to this amendment are now becoming very limited. The expat exemption only relates to South Africans who are tax resident, so the obvious answer would be to cease tax residency of South Africa,” says Leon.

“However, doing this isn’t as simple as one might think. There are different options when doing this, but by far the cleanest and most direct approach would be to financially emigrate, provided this is done correctly.”

He cautions that ceasing tax residency, however, comes with certain tax implications, which must be understood fully before one embarks on this path.

 

For information as to how Relocation Africa can help you with your Mobility, Immigration, Research, Remuneration, and Expat Tax needs, email info@relocationafrica.com, or call us on +27 21 763 4240.

Sources: [1], [2]. Image sources: [1], [2].

Artificial Intelligence In the World of Tax

Data analytics and automated robotic processes – two concepts that have become business game-changers.

– Shohana Mohan (Relocation Africa Expatriate Tax Consultant)

Just how far can artificial intelligence (AI) take us in ensuring that we maintain levels of compliance and ensure efficiency in the world of tax?

Tax technology is the new normal in enabling the business process, improving efficiencies in the integrity of critical data sets and acting as a safety net during business interruption. Increasing the integrity of data ensures that it can be used for diagnostic reviews and to provide definitive tax solutions for businesses.

Tax compliance? Software can enable the tax function through robotic process applications (RPAs). Business risk management and control frameworks can therefore be automated to collate real-time information to provide businesses and tax reviewers with dashboards of reliable information.

For tax practitioners, capacity and resource planning is a critical aspect in the tax life cycle. Prescribed timelines provided for in the Tax Administration Act must be adhered to. Pegging key milestones based on the alternative dispute resolution process can help the tax practitioner to act within the prescribed timelines and for the taxpayer to keep abreast of the developments in the dispute resolution process.

Volume submissions, including bottlenecked deadlines, can include provisional tax filing, employer tax declarations and Vat submissions due simultaneously – with RPAs ensuring accurate transfer of data and extrapolation for specific disclosures, with minimal manual intervention.

Through customised automation and interface of an organisation’s enterprise resource planning (ERP), the submission of tax and related declaration information, and the ultimate upload onto the Sars easyFile platform, should be less of the focus. Time is well spent when resources are in a position to free their time to focus on more risk management aspects (such as whether specific fringe benefits are being included in remuneration, subject to employees’ tax withholding).

AI for global mobility

Globally mobile employees require specific tax reporting and disclosure in multiple jurisdictions. Lack of tracking of travel associated with physical presence in a jurisdiction can create tax risks for the business. For example, creation of potential permanent establishment risks for corporate income tax purposes can be triggered by the physical presence of an employee in a specific jurisdiction. Building AI to inform the physical presence of an employee can trigger specific red flags for business through an automated process, thereby assisting businesses to reduce potential tax risk.

Gathering of information is a time consuming process for a person who is a tax resident of one country and non-resident in another where they physically render a service. Different tax treatment in the resident and non-resident locations present opportunities for the taxpayer to claim certain tax relief, such as overseas work days as non-sourced income. Data from a single data entry perspective can help business to mitigate tax risks and enables the employee to remain tax compliant in the locations in which work is performed, thereby reducing reputational risk for new start-up businesses in foreign locations.

Is AI necessary, and what could go wrong?

Non-compliance includes the non-rendition of a return or not submitting specific information as required in the form and manner required by Sars. Lack of accurate data, coupled with gearing toward submission deadline, can lead to inaccurate submissions being made to Sars, in which case the risk of audit is high and underpayment of tax is subject to specific penalties. Having clearly defined automated processes, attaching to specific timelines and deliverables assists in on-time submission of documentation or responses to Sars.

Automating the tax return life cycle, including the dispute resolution processes, can significantly enhance the service offering for most tax practitioners. Although RPAs operate as enablers within the tax function, artificial intelligence cannot replace the tax technical and advisory in its entirety. Typical process flows to enable the compliance function should therefore be automated and pegged with specific milestones. Automating processes to reduce manual intervention and error is critical in providing a value added service offering.

Death by automation

Methodology is important in order to understand the objectives for RPAs and other automated processes.

* Automation for data sets, mining of data: Data analytics plays a vital role in enhancing the quality of the data extracted in order for accurate advice and estimations of tax liability to be provided. Analysing data sets can be used for the different tax disciplines; for example, data extracted can be used for various transactional tax reviews, such as employees’ tax (PAYE) and Vat.

* Automation for tax technical: Tax advisory as a specialist tax function makes use of specific facts and circumstances to present possible tax outcomes. Infinite permutations and ‘what if’ scenarios can present significant challenges for the tax practitioner and should be cautioned. Reliance on automated tax opinions and solutions should be cautioned given that specific carve-outs (indemnities/disclaimers attaching to use of the software) may result in the taxpayer not having recourse at a later stage.

Automating an arrangement of principles to achieve a tax technical outcome can be achieved by automating the process elements used to provide definitive results, advice and recommendations. However, manual intervention based on tax technical is applied on a case by case basis.

AI following the shift

Recent legislative changes are making reporting a key requirement for multi-jurisdictional entities. The Country by Country Reporting Standards legislation mandates the form and manner in which multi-jurisdictional entities are required to report in terms of the headquarter reporting regime. RPA can enable the compliance requirement to ensure the integrity of the data that gets extracted, allowing sufficient time for resources to focus on the critical aspects linked to the technicalities of such reporting.

The devil is in the detail. Having a trusted RPA with a reliable method for reporting and disclosure can make the world of tax a little more certain!

 

Relocation Africa provides a range of Expat Tax-related services. These include services relating to tax advisory, compliance, and calculations. To find out more, visit our website by clicking here.

For information as to how Relocation Africa can help you with your Mobility, Immigration, Research, Remuneration, and Expat Tax needs, email marketing@relocationafrica.com, or call us on +27 21 763 4240.

Sources: [1], [2]. Image sources: Franck V [1], [2].

Proposed Changes to South Africa’s Expat Tax Legislation

The South African government is making a move towards changing its tax on remuneration earned outside South Africa – which could see some expats pay as much as 45% on earnings outside R1 million.

According to Tax Consulting SA, National Treasury has invited key stakeholders to a workshop in March 2019 to address concerns around the planned regulations, which opens up the way for possible tweaking and changes ahead of the planned implementation date of March 2020.

Industry experts believe that the changes are a certainty, even if the draft laws are changed in some way before implementation – and this has some expats worried, with confusion persisting over who the new laws will affect, and how.

Current laws

Currently, South Africans who are earning income abroad are assessed in terms of residency.

In terms of section 10(1)(o)(ii) of the Income Tax Act, if you are working overseas and do not meet the physical presence requirements to be an ordinary resident in South Africa, you are exempt from tax on any foreign income.

To qualify for this exemption, an employee needs to have spent more than 183 full days (including a continuous period of more than 60 full days) outside of the country working, in any 12-month period.

If this requirement isn’t met, then the employee is taxed on worldwide income.

Proposed changes

Originally, the draft regulations proposed the complete repeal of section 10(1)(o)(ii) of the Income Tax Act – the section that deals directly with taxation on foreign remuneration.

Under these conditions, all foreign income would have been taxed by SARS, and citizens would have to claim a credit against South African tax payable for any foreign taxes paid on that foreign income.

The draft regulations were later softened to not be a complete repeal, but that section 10(1)(0)(ii) be changed so that only the first R1 million of foreign remuneration will remain exempt from tax in SA – even if an individual meets the requirements of exemption.

One of the main reasons given for the changes is to curb situations of double non-taxation – being situations in which an individual’s employment income is not subject to tax in either South Africa or in the foreign country where the services are rendered.

Who does it affect?

The proposed changes will affect any South African employees who are earning an income overseas, making over R1 million in the year of assessment.

It will also impact companies that send employees overseas for work, who will have to deal with the new tax implications.

South Africans who have permanently left the country, who have not settled their tax affairs (through financial emigration) may also be subject to the changes, depending on their individual circumstances.

Young people, or anyone who is travelling and working abroad who qualify for exemption under section 10(1)(o)(ii) will remain exempt, provided they earn less than R1 million in the year.

Non-residents

The tax changes could also impact people who are permanently living abroad, who currently qualify for exemption based on section 10(1)(o)(ii). These South Africans are typically not ordinarily resident in South Africa, but may have assets in the country, which could impact how SARS sees their tax affairs.

SARS has a set guideline – called the physical presence test – to determine whether a South African is resident, based on physical presence in the country.

This is for a period or periods exceeding:

91 days in total during the year of assessment under consideration;
91 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
915 days in total during those five preceding years of assessment.
“An individual who fails to meet any one of these three requirements will not satisfy the physical presence test. In addition, any individual who meets the physical presence test, but is outside South Africa for a continuous period of at least 330 full days, will not be regarded as a resident from the day on which that individual ceased to be physically present,” SARS said.

If an individual passes the physical presence test, they will be taxed on their worldwide income in South Africa.

What if you are living in two countries?

In situations where South Africans are split between two nations – working overseas for extended periods of time, but remaining an ordinary resident in South Africa – SARS has double taxation agreements (DTA) with certain countries to determine who has exclusive rights to your taxes.

“South Africa has DTAs with a number of other countries with a view to, amongst other things; prevent double taxation of income accruing to South African taxpayers from foreign sources, or of income accruing to foreign taxpayers from South African sources,” SARS said.

In an interview after the draft regulations were published, Sable International, explained that DTA has different checks and balances, but typically boils down to where most of your assets are (like a permanent home) and where your family is. However, this is subject to a more in-depth investigation from SARS.

It is worth noting, however, that for ordinary residents, all income sources within South Africa will still be taxable in South Africa.

The coming laws only apply to your foreign income – normal tax is paid on all South African assets and capital gains made on those assets in the country.

South Africans who have permanently left the country, who still have assets in the country, are still taxed on those assets, with the only way to divorce being through financial emigration.

Is financial emigration necessary?

According to Sable International, financial emigration – being the legal process of cutting all tax ties to South Africa – may not be necessary to avoid the expat tax, provided you meet the right requirements.

If you are a non-resident (South African living abroad) and can prove to SARS you are ordinarily resident in the country you’re living in, then the tax should not apply.

If you are in a dual-residency situation, SARS may have a DTA with the country you’re living in that may make you exempt.

However, this is specific to each individual situation, with no real general exemption that applies to all expats outside the section 10(1)(0)(ii) limits.

 

For information as to how Relocation Africa can help you with your Mobility, Immigration, Research, Remuneration, and Expat Tax needs, email marketing@relocationafrica.com, or call us on +27 21 763 4240.

Sources: [1], [2]. Image sources: rawpixel [1], [2].

We Have Launched a New Expatriate Tax Division

Relocation Africa Group has added expatriate tax solution to our suite of services. We believe this is a key service for multinational companies who are relocating expatriates to Africa. We are now able to offer advisory services in the expatriate tax and payroll compliance space. We have also added Payroll Advisory services to support multinationals in ensuring compliance throughout their business ventures into Africa.

We are able to help with the following services:

EXPATRIATE TAX ADVISORY

  • Residence analysis and interpretation
  • Cross border advisory: interpretation of Double Taxation Agreements
  • Non-resident employer obligations
  • Assignment structuring – optimisation of elements of pay
  • International Assignment Policy drafting and implementation

HYPOTHETICAL TAX CALCULATIONS

  • Tax gross up calculations
  • Monthly PAYE, SDL, UIF calculations
  • Tax equalisation settlement calculations
  • Assignment cost projection calculations

EXPATRIATE TAX COMPLIANCE

REGISTRATION:

  • Non-resident employer – branch registration for PAYE, SDL, UIF
  • Registration as individual taxpayer with SARS
  • Provisional tax registration – advice and recommendations

TAX RETURN COMPLIANCE

  • Collation of information to prepare a tax return
  • Review IRP5 certificate
  • Resident/non-resident basis of filing
  • Preparation and submission of return
  • Review of tax assessment
  • Incorrect assessment: objection and appeal process

For more information about our new division, and the Expatriate Tax services we can help you with, click here.

For information as to how Relocation Africa can help you with your Mobility, Immigration, Research, Remuneration, and Expat Tax needs, email marketing@relocationafrica.com, or call us on +27 21 763 4240.

Sources: [1]. Image sources: [1].