Expatriate Tax Services – Individual Engagement
(Expatriates Working Outside South Africa)
We have extensive clients who are internationally mobile employees, who engage us on personal basis, as opposed to the employer engaging us for expatriate tax services. Where there is not an employer involved with the proactive planning, the tax outcome cannot be predicted. The tax cost is also significant where the planning is not done correctly.
South Africa moved from a source base system of taxation to a residency basis of taxation some 10 years ago. This means that South African residents have to disclose their world-wide income in their personal income tax submissions. The most common misconceptions in the market hereon are that (a) because an employee has left South Africa, they are no longer required to file a tax return (b) because the employee has left South Africa, they can submit a zero tax filing (c) that there is an automatic tax de-registration where an employee leaves South Africa and that you become “non-resident” as a matter of course (d) that the exemption for income applies to all income, including investment income and income earned whilst working in South Africa (e) that the offshore employment income and benefits need not be disclosed (f) that there is not active enforcement by SARS hereon. The reality is that this is a critical area of compliance focus for the South African Revenue Service and that many South Africans working abroad find out the hard way that the tax position cannot be ignored. The best position is to remain fully compliant with South African tax law.
We effectively provide a full compliance service for South African employees working outside South Africa. The cost effective delivery of this service means that we adopt a structured approach only, thus we are assured that first-time accurate guidance is provided and that a compliant position is achieved at reasonable cost. Our approach on new engagements –
- Transfer of e-filing profile. We only accept engagements on our e-filing profile for these employees and the profile is transferred back where service is terminated, for example where the expatriate has full-time returned to South Africa – no charge
- Full tax status update on income tax, provisional tax, SARS penalty accounts and notices. We have some expatriates attempting to do this themselves, however, obtaining the correct full status update is not always done correctly, which can create severe implications later. Therefore, we take ownership of this step and with the necessary SARS references, at a small administrative charge – R280 plus VAT.
- Review of days outside South Africa and employment contract. The purpose is to confirm the tax exemption and also provide guidance on what needs to be done, if anything, to secure the tax exemption and / or maintain the tax exemption. This is a critical step, as where your tax return is correctly submitted to SARS, there will always be a request by SARS for a copy of (a) the days outside (b) certified passport to confirm the days (c) copy of the employment agreement. Some taxpayers believe that an exemption from tax means you do not need to disclose. This is completely incorrect in law. An exemption means that you fully disclose, claim the exemption and that SARS gives the exemption on your tax assessment. The review phase is R2,200 plus VAT.
- Expatriate tax filings for South Africans abroad. The cost depends on the complexity of your other income, including investment income (interest, rental, dividends, capital gains), whether you had part year South African income (against which you may want to claim travel allowance, company vehicle deduction), retirement annuity claims, medical credits, income disability tax deductions and other deductions. We provide a costing for the filing, once we have all information. Our normal expatriate tax filing is R2,200 plus VAT, to provide an indication of costs.
- SARS supporting documents / tax objection process / SARS audit. The norm is that SARS requests supporting documents. The cost for supporting documents is R450 plus VAT. However, in cases where an objection is required, we provide a costing on estimate of professional time and before proceeding. The normal cost for an objection process and to SARS agreement is between R2,200 and R3,200 plus VAT. We have not had a single case where our objection has not been allowed by SARS, where we have satisfied ourselves that the tax exemption should be given.
- Tax Refunds. The payment of tax refunds can be a complicated process and we normally cost these on an individual basis. We also work on a retainer where the refund is obtained, based on a percentage of the refund paid. The above costing structure will then not apply, however, we normally prefer to operate on hourly rates. The retainer is mostly selected by clients who do not want to operate on professional hourly rates and where we are unsure to provide a firm indication on the timing of any SARS refund.
South African Tax Status
South Africans who work abroad should first consider whether they are still regarded as tax resident in South Africa. See Residency Test.
- Should you be a tax resident in South Africa, you will have to disclose your worldwide income in your South African individual tax return. Many exemptions and deductions may then be claimed against the income that you derived outside South Africa. See Foreign Tax Credit and Earnings exemption.
- Should you not be tax resident, you will only have to disclose your South African source income in your individual income tax return. This will be for instance interest from a South African bank account and income from a property that you are renting out in South Africa. Should you have no South African source income you may deregister from South African tax. See also the above links.
It is important to still ensure that your tax returns are accurately completed. If not, you may find it difficult to answer all the South African Revenue Service questions to their satisfaction when you return to South Africa one day and start submitting normal income tax returns.
South African Tax Planning and Compliance
The basic rule is that, should your affairs be planned well, you will normally not have to pay any additional taxes in South Africa. This is because the way our system is structured and taking into account the various exemptions and relief available. However, where tax matters are not planned and income tax submissions are not kept up to date, we know of many instances where the tax authorities enjoyed a bit of a windfall. Your planning should incorporate the following:
- The income you earn should always be employment income. Should you be an independent contractor, planning should be done to change the nature of your income by for instance the interposition of a company;
- Where your investments are located and the type of structures that you are investing in should be considered. It is better, from a tax perspective, to earn South African dividends than foreign dividends, often better to earn foreign interest as an expatriate that to earn South African interest. Also, it is a good idea to reconsider whether your South African retirement annuity, unit trusts etc still makes sense;
- Think carefully about how you rent out your South African property to minimise your net rental profits legally and thereby also reducing your income tax payable;
- Certain matters need to be considered depending on where you are in life. Retirement planning, share options, non-South African property, donations, whether a legally established trust structure will benefit you, capital gains tax planning etc.
Let us know should you have any specific questions concerning your personal circumstances. It is only by looking at your specifics that we will be able to provide you correct advice. See Your Tax Questions
Foreign employees working in South Africa
The problem that most foreign persons in South Africa face is that local employers and tax practitioners (often the South African Revenue Services as well!) want to treat you like normal South Africans. This is not correct and in your best interest. Depending on your circumstances, different rules apply to you and these rules will always be to your benefit.
Expatriates in South Africa planning
Planning for expatriate employees to South Africa is of the utmost importance. It will pay you to go to lengths to ensure that you are not tax resident in South Africa. Should you have no choice but to become tax resident, it will still be a good idea to know in advance when you will become tax resident and thereby making use of certain planning before you become resident. See Residency Test. The work permit class and application should also be carefully considered as this may have an impact on your tax status or, even more concerning for most, impact on your exchange control residency.
Expatriate tax obligations
As a non-resident you will pay tax on your South African source income. This means income earned or made by doing or investing something in South Africa. The rules can become quite complex but the following is a good starting point:
- Income from workdays in South Africa. Note that days worked outside South Africa are not taxable in South Africa. Income that you earn when working outside South Africa will therefore be tax free and should your employer have incorrectly withhold PAYE thereon, they should correct their mistake. Let me know should they disagree and to get the full legal argument;
- You will not pay any tax on investments outside South Africa. This would include interest, shares speculation gains, dividends, income from property etc. Many people ask whether you pay tax on such income when the money is brought to South Africa. The basis for this question is known as the remittance basis of taxation. South Africa does not operate on a remittance basis. When income is exempt under the source principle, there is no income tax implication. Remitting any income to South Africa has no tax consequence;
Planning expatriate pay in South Africa
Expatriate employees coming to South Africa often falls in the pitfall that they let local employers structure their packages like other local employees. This is seldom the best outcome for the expatriate or the employer. The following matters should normally be considered:
- Rand or other currency package;
- Where the expatriate will be working;
- Who is the employer of the expatriate (applicable where we are dealing with secondments and inter-company transfers);
- Is the expatriate’s package guaranteed net or gross;
- Relocation allowances;
- Residential accommodation provided by the employer is exempt should the accommodation not be the expatriate’s “usual place of residence”;
- What benefit entitlement should the expatriate receive such as car, medical cover, offshore or local retirement funding, home leave, children school costs, security etc.
Expatriate employment agreements
The above should be negotiated before the expatriate’s employment agreement is signed. Special clauses to give legal effect to the above should be considered and this must be part of the final expatriate agreement. The practice of giving one letter of employment initially, another for the work permit application and then a final one for the tax consequences does not work. Professional tax filing assistance is also a must-have for an expatriate employee. Proper planning and tax preparation really can save a not insignificant amount of taxes.
There is quite a bit more to say about expatriate employees in South Africa. Let us know some of your personal detail under Your Tax Questions for more specific advice.