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Expats to be affected by new tax laws

21 Jul 2017

The National Treasury has published draft tax law amendments for 2017, which contains details on tax treatment of South Africans performing their employment abroad.

The draft law published proposes a far harsher tax treatment, recommending that the exemption section 10(1)(o)(ii) be completely repealed. This means foreign employment income will become fully taxable and the only relief may be claimed is foreign taxes paid as a tax credit. For example, where the employee falls into the 45% tax bracket and pays 25% tax in the foreign country, the SARS will now collect the difference of 20%.

The current tax law determines that South African tax residents abroad must disclose their worldwide income to SARS and may then claim an exemption on their employment income physically earned outside South Africa.

Pravin Gordhan announced in his Budget Speech on 22 February 2017 that changes to this section were on the horizon. The suggestion was made that the exemption should not apply where the employee is not being taxed in the foreign country.

There are limited options for South Africans abroad, should this law take effect. One alternative would be to properly emigrate, in which case there is a deemed disposal capital gains tax event. SARS probably anticipates this likely move, as the 2016/17 tax return now has a specific disclosure hereon, which never previously existed. Other taxpayers are looking at establishing tax treaty residency in another country but this is not as simple as getting a tax residency certificate somewhere else. Anyone who has been through a SARS process hereon would know how complex this might become.

We have seen some expatriates indicating that with full tax on international employment income, which is what is effectively proposed, coupled with the high costs of international work, coming home may be their only alternative.

This law is proposed to take effect 1 March 2019 onwards, so clearly there is a bit of grace period given for expatriates to get their house in order. More urgent, however, is the comment deadline of 18 August 2017, so expatriates and their advisors should act in haste in submitting their comments on this change to National Treasury.