National Treasury has confirmed that the tax exemption for foreign employment income, as contained in section 10(1)(o)(ii) of the Income Tax Act, will be amended to allow for the first R1 million of foreign remuneration per year to be exempt from tax in South Africa if the individual is outside of South Africa, for a certain period of time. This is a welcome change from Treasury’s previous stance on the matter, which proposed a complete repeal of the exemption, with foreign remuneration consequently fully taxable in South Africa.
Section 10(1)(o)(ii) was introduced in 2001, when South Africa changed to a residence-based tax system, whereby South African tax residents became taxable in South Africa on their worldwide income. The exemption in its current form applies where a South African resident renders services as an employee, while outside South Africa. The individual must be outside South Africa for more than 183 days in total, during any 12-month period, beginning or ending in the relevant year of assessment. Furthermore, at least 60 of the days outside South Africa must be consecutive.
The exemption only applies to foreign source remuneration. Should an employee earn both South African source income for work performed in South Africa and foreign source remuneration for work performed overseas, an apportionment would have to be performed, based on work days spent inside and outside South Africa, with the exemption only applicable to the foreign remuneration portion. This approach was confirmed by SARS in Interpretation Note: No. 16.
With the interpretation of the exemption on SARS’ radar, it was announced in the 2017 Budget that, in order to prevent double non-taxation of foreign remuneration, the exemption would only apply if the foreign remuneration was subject to tax in the foreign country. With the release of the 2017 Draft Taxation Laws Amendment Bill on 19 July 2017, there was a further change in that it was proposed that the exemption be completely repealed with effect from 1 March 2019. As a result, the individual would be fully taxed in South Africa on any foreign remuneration, and would have to claim a credit against South African tax payable for any foreign taxes paid on that foreign income.
Unsurprisingly, Treasury received various responses from interested parties, regarding the proposed repeal. Many of the responses centred around the high cost of living abroad in comparison to South Africa, with the proposed repeal making it difficult for South African expatriates to continue to live and work abroad. In response, Treasury has confirmed that an annual R1 million exemption for foreign remuneration will apply with effect from 1 March 2020.
This is a significant improvement from Treasury’s previous stance, with lower to middle class income earners unlikely to be affected by the amendment.
Despite the change, concerns remain regarding the proposed amendment. The amendment may deter multinational corporations from investing in Africa, using South Africa as a gateway. Multinationals wishing to second South African employees to work in Africa and ensure that such employees maintain the equivalent take-home pay as before, would be required to increase their payroll cost. Furthermore, the compliance burden associated with the foreign tax credit system may result in effective double taxation of the foreign remuneration, due to delays experienced in claiming the credit.
It should be emphasised that section 10(1)(o)(ii) only applies to South African tax residents. South African expatriates who have formally emigrated or have ceased to be tax residents, would only be taxed in South Africa on South African source income. While a change of tax residence may be relatively easily achieved for certain expatriates, the consequences of such a change can be significant from a tax perspective. A South African tax resident who formally emigrates or ceases to be a tax resident as defined, is deemed to have disposed of all his/her assets at market value (excluding immovable property situated in South Africa, or an interest therein), on which capital gains tax would apply. It is recommended that South African expatriates who are considering relinquishing their South African tax residency, consult a tax professional.