By Amanda Visser
South Africans working abroad may be subjected to double taxation if the latest draft interpretation note on foreign sourced income is not reconsidered.
South African expats already face a less favourable tax regime with the foreign income tax exemption that will be capped at R1 million from March 2020. All income above that will be subjected to tax in SA.
The South African Revenue Service (SARS) issued a draft interpretation note which deals with tax credits and deductions in October 2019 and have since received comments from industry players.
Currently South Africans may claim tax credits where they have been taxed in the country they are working and in SA on the same income. When they have been wrongfully taxed, there was the possibility of obtaining a tax credit. However, despite having this relief, the process was not always seamless, says Thomas Lobban, tax associate at Tax Consulting SA. The standard of proof for the taxpayer is quite high. SARS typically wants to see either a certificate from the employer showing that tax has been withheld or a tax assessment filed by the taxpayer in the foreign country. ‘Without either of these two documents, SARS is likely to disallow the credit, which means the taxpayer must file an objection and follow a dispute resolution process.’
The credit system will become of more importance from March 2020 to South African taxpayers working abroad, says Lobban. Many have been enjoying the full tax exemption on the income if they have been working for at least 183 days of a consecutive 12-month period outside South Africa, and if at least 60 of those 183 days have been continuous.
SA has agreements with several countries to address instances of double taxation. A double taxation agreement often limits the right of the source country (where the South African is working) to tax income if the income is earned by a tax resident of the other country. However, in certain instances foreign jurisdictions, in violation of their tax treaty with South Africa, do tax South African tax residents on income earned within the foreign jurisdiction. To this end the government introduced a section in the Income Tax Act (section 6quin) which provided for tax credits when the foreign country levied tax on the same income that was also taxed in SA. The section also allowed for a deduction when the tax was levied wrongfully. The section was deleted in 2016, but taxpayers were still granted relief under section 6quat. SARS now wants to change its interpretation of the article and thus of the relief granted.
Joon Chong, partner at Webber Wentzel, says some African tax authorities do not have the rights to charge any withholding payments because the South African company does not have a permanent establishment in that country. In a clear violation of the tax treaty they do levy tax, mainly to increase their own revenue. However, in order to claim relief, the payments must be ‘proved to be payable’ in terms of the tax treaty, she explains.
‘Proved to be payable’ means that the treaty allows the foreign country the taxing rights on the income earned. If the individual spent more than 183 days working in the foreign country, then the amount can be taxed in that country, but if it was less than 183 days there are no taxing rights on the income earned.
If income tax or a withholding tax was levied nonetheless, there is no proof that it was supposed to be paid. This puts the individual or company against the foreign tax authority that overstepped their bounds.
Beatrie Gouws, head of strategic development at the South African Institute of Tax Professionals, says the only “relief” for taxpayers is to approach SARS to intervene on their behalf through the “competent authority mechanism” – meaning SARS have to take up the battle with the foreign tax authority.
‘SARS can use its discretion whether it will take on the battle on your behalf to rectify the situation. If SARS doesn’t take action, it is not their loss, but the loss of the taxpayer’.
This post is also available in: Afrikaans