What is a Double Taxation Agreement?
A DTA is a legal and binding bi-lateral treaty between two countries that specifies which country’s tax authority holds the right to tax you on your earnings. In other words, where you are resident in one country and earning income in another, a DTA will determine taxing rights between the two countries concerned. The true purpose of the agreement is to protect your foreign income from being taxed by both countries. At the same time, it promotes foreign investment and creates the mutual exchange of tax information.
The South African Revenue Service (“SARS”) has made a point of forcefully pursuing compliance of South Africans earning a foreign-sourced income. Where non-compliant, SARS could issue audit requests, penalties and interest, or even initiate prosecution. Applying for tax relief under a DTA, is a sure way to remain compliant while minimising your exposure to taxation.
DTAs have a range of applications and can be fraught with technical aspects and requirements, which is why it is a niche area of expertise in cross-border taxation. Because it is a complex area of tax law, there are numerous misconceptions that find their way into social media groups. Here are 5 misconceptions to be mindful of:
1. A DTA offers permanent tax relief to expats
Where you previously qualified for relief under a DTA, it is important to note that the application and assessment process must be done every year. For as long as you remain a resident of South Africa you must file tax returns every year, and as long as you file tax returns you must also submit an application to request relief under that DTA.
2. I automatically qualify for DTA relief
The fact that there is a DTA in place between South Africa and the host country, does not mean you automatically qualify for relief under that DTA. There are qualifying criteria that must first be assessed in a tie-breaker test. This test will help you to ascertain which of the two jurisdictions has the right to tax your earnings first. The test considers your presence in the country, where your “centre of vital interest” lie (such as your house, family, etc) and whether you have obtained a tax residency in the host country. Once you have these in place, then you can cease your tax residency in South Africa under a DTA, as per Qualification Basis 3 on SARS’s website.
3. I can’t obtain tax residency in a host country
The commencement of tax residency is almost always automatic, permitting that you meet the specific days-in-country requirements for that country to see you as a tax resident. However, if a DTA deems you to no longer be a resident or you fail to meet the legal requirements, you will not automatically be seen as a tax resident.
4. I can’t cease my tax residency in South Africa
If you wish to cease your residency by means of a DTA, you will need a certificate of tax residence from the foreign revenue authority or a letter from the authority that indicates your status as a tax resident in the host country.
After your factual circumstances and objective evidence have been proven to be in favour of the other country, being the country of sole tax residence, then you can claim non-residency with SARS. The point is to prove to SARS that you are no longer a resident for tax purposes.
5. After qualifying for a DTA, I don’t have to pay tax on my SA income
This is a very dangerous misinterpretation of the relief provided for under a DTA. You must always pay tax on RSA-sourced income, whether rental income or returns on a South African investment. DTAs only provide for a tax credit between countries, which is where your country of residency offsets your tax against your foreign taxes paid. In other words, under a DTA you will pay tax on your foreign earnings to the revenue authority in the host country and not in both jurisdictions.
The snake in the grass
Expatriates are susceptible to erroneous advice. Whether because they are swept away by the trials of working in a foreign country or simply because they are too far away from home, they must be diligent when it comes to deciding which tax advice to listen to. Hearsay tips and suggestions on social media platforms do not address the uniqueness of a specific DTA or the circumstances of the individual.
SARS has published all the DTAs they identify with on their website, listed in alphabetical according to each country for ease of reference. They are readily available to taxpayers, their advisors, as well as their employers. Yet, it is seldom referenced when tax advice is being given. Article 4 of each DTA is of great significance when it comes to applying for tax relief, because the taxpayer must work through every point to ensure that there are no misconceptions.
If your tax consultant does not work through the relevant DTA with you, then that should be a major concern. If your tax advisor says that they will submit your returns and mark you as tax exempt, then that is an even bigger concern. If you are advised not to declare or show any proof of income to SARS, then you are in danger of committing tax fraud. These scenarios could lead to a SARS audit, where the questions will be directed at you – not your advisor.