JOHANNESBURG — The days are looking numbered for foreign employment income tax exemption for South African citizens and residents. National Treasury controversially wants to scrap the exemption which was originally introduced to prevent double taxation of South African residents and citizens working outside the country for more than 183 days. Government is moving quickly on the law change as it has already issued two draft bills for public comment last week, these being the 2017 Taxation Laws Amendment Bill and the 2017 Draft Tax Administration Laws Amendment Bill. If accepted, the bills will activate tax proposals — which were first announced by former Finance Minister Pravin Gordhan during his 2017 budget speech — by March 2019. Saffers in tax-free zones – such as those in the UAE and other Gulf states – are expected to be hit hardest by the updated laws. Meanwhile, the implications for Saffers living in low tax zones is that they will be expected to pay a tax difference over to SARS, dependent on which tax bracket they fall under in ZAR terms. Saffers opposed to the mooted tax rules, though, still have some time to voice their concerns with government. Meanwhile, there is also a petition on Facebook and Change.org that is growing in momentum, having notched up thousands of digital signatures. In this interview, Jerry Botha, managing partner of Tax Consulting South Africa, unpacks what Treasury’s new tax plan means for expats living and working abroad. – Gareth van Zyl
I’m speaking to Jerry Botha who is the managing partner of Tax Consulting SA. Jerry, thanks for chatting to me today. If you are currently a SA citizen and if you’re working in a different country there is basically a tax exemption for you. It means that if you’re working outside of the country for more than 183 days you won’t be taxed. But National Treasury wants to repeal this as indicated by former Finance Minister Pravin Gordhan. What is the background to this?
Firstly, SA was always historically a source based system. Then in 2001, we changed to residency based system, which is when they’re taxing your worldwide income. Just to be clear on that, it’s not your citizenship that counts. It’s whether you are a tax resident so that would normally be somebody that still comes home to SA every year, who just works abroad and who is not settled permanently overseas. Somebody that’s financially emigrated for example.
But whether you’re citizens or noncitizen, people that apply for permanent residence in SA would also incorporate that. Then the background clause. When they implemented this worldwide basis of tax, like all other countries pretty much around the world, they said we’re going to exempt the employment income. They went for the exemption model so, your residents. You have to declare your worldwide income but you can claim an exemption of your employment income only – if you do a certain amount of time outside SA.
That has worked wonders for the past 15 – 16 years. Now what they’ve done is, well basically, what happens is the Minister of Finance, on the 22nd February, then Mr Pravin Gordhan, said we are going to only give you that exemption if you can prove that you are paying tax in another country because obviously, some expats plan their affairs in such a way that they would pay tax nowhere. Now, the surprise is when on the 18th July, they’ve announced a small change. They didn’t just say oh, the exemption doesn’t apply if you pay tax somewhere else. It just said we’re going to delete that whole section. You’re going to have to declare your worldwide income and the only thing you can claim is credit that you might earn in another country.
Government wants to effect this new legislation by the 1st March 2019. Do you think that that’s realistic?
Government has recently been, I think actually, they’ve had to back-date some legislation. There was within the past couple of months, a High Court decision that said, tax law can be retrospectively applied. The fact that they’re only doing it on 1st March 2019 onwards – it is very clearly indicating that they know this is a bit of a hot potato. They’re giving guys ample time to sort out their affairs. Like pretty much all other laws would normally have been made effective when it was announced and we actually expected it was going to be effective on the 1st March 2018. That’s a bit of a leeway they give us.
How is this going to work exactly? If I’m an expat in the UAE, for example, or even in a low-tax zone, like Singapore, how is Government going to ensure that I pay my fair due of tax over to SARS?
Well, I think that’s a slippery concept. I think what we see with expats is you get large expats that is fully complied. They’ve always got their Returns correctly. Then of course, you’ve got a lot of expats that just left and stopped declaring taxes or just putting zero on their Tax Returns. They only declare their worldwide interest dividends or rental income and stuff like that. In the spectrum, you get everybody.
What happened; however, and this is a game changer, is that the US are pretty much the guys who have figured out best how to clamp down on tax avoidance. And they’ve got a system that basically says that if you’ve got a foreign bank account, that foreign bank account has to be declared to the US Regulatory Authorities. What the OECD have done now is they have is they have copied that approach because it works so well. I think there’s over a hundred, or close to two-hundred and odd countries, pretty much all countries that is subscribing to this new system called CRS or Combat Reporting Standards.
What it does, if you are a SA resident or a SA citizen, or you’ve told any financial institution around the world that you invest in SA. There’s going to be an automatic exchange of information so, SARS will know. The question is just when will they act? What I’ve just explained now is the preamble to this special BDP program. That’s why SARS last year said, “Guys, you’re going to get this information under the common law reporting standards.” We’re going to know about you. We’re going to give you another special amnesty to come clean. Otherwise you can’t complain that we do come after you.
How would this compare to other countries? You mentioned how the US has found an interesting way to tackle this. For example, if I’m a UK or a US citizen, how would those countries tackle my tax if I’m living and working in a different country?
Well you know, both of the systems work well for them. The US will obviously, keep their residence forever. As long as you’ve got a Green Card – you’ve got a US citizenship. They say for that privilege you must file US tax returns and worldwide income. The US have got a rule that says, your first $100 000 per year that you earn, as employment income, is exempt. So, they said your first $100 000 is exempt and after that you can start paying tax. So, pretty much they’re just hitting the top-end of that calculation.
The UK however, they’ve got a far more clinical way of saying, if you leave the UK and you’re more than 183 days out of the UK, etcetera. We’re just going to make you a non-resident and you don’t have to declare your worldwide income. They have opposite ends of the spectrum.
In SA however, as long as you’ve an intention of returning to SA. As long as SA remains your main home, then you are still regarded as a tax resident except if you claim to be a tax treaty resident in another country. I might just add, a lot of the expats obviously, are saying they are going to rely on treaties. The issue there is I think SA has only got about 78 treaties in existence and there’s 190 odd countries around the world so, there’s a lot of expats in other countries, which would not have that treaty release and then also, just practically, to claim treaty relief against SARS, it’s a tough process.
If I’m in Dubai and I’m not paying tax – obviously, that’s a tax-free zone – what percentage of tax would I be looking (or being asked) to pay to SARS? Would SARS then take my income and translate it into Rands and then say, ‘okay, you fit into this bracket so, you’re going to pay this X percentage of tax’?
Absolutely correct so, our tax law is that every individual you can use the average exchange rate. You could look at the end of the year at what the SARS average exchange rate is and you convert it to Rand and then the normal tax payables would apply to that. I can think it’s early days. I do think and I might just add that there’s a good couple of examples in our law where tax law was forced through and then 3 – 4 years later it was changed back because it simply didn’t happen. I think we really hope that will not be the case here. I do think that if expats properly levy or lobby things, there could be cases before these things start to get promulgated.
I just want to add two points. A couple of years ago Treasury proposed to remove the interest exemption to say that you’re not going to get tax free interest anymore. That was completely lobbied out of the law. That interest exemption is still there. Yes, they haven’t increased it every year but basically, there was such a strong voice to keep it that it was retained so, I do think people should write to Treasury and, as a citizen you’ve got a right to do that.
The other point that I just want to add, and this seems to be the biggest issue for expats. A gentleman in Dubai, because I got to learn them quite well. Barry Pretorius has started an expat petition group and a lot of these guys… Their biggest fear is the cost of living that they incur on that side and at the moment, our tax law takes action on those things. They’re not going to give you a deduction for all those cost of living items, the flights back home, and the other taxes that you pay in the other countries. A lot of them support SA families back home so, this tax law is actually, not going to just hit South Africans abroad so much. It’s going to hit obviously, people that is supported back home. I don’t know to what extent National Treasury has got information on which it made a good decision on this. We don’t know but we’ll figure that out through the Parliamentary commentary process I guess.
Yes, because obviously, there’s a huge amount of remittances that are sent back to SA, correct?
I think so. A lot of the guys’ personal tax we do. They support parents. They support family. You might think these guys go work there and stay in just better than a tent in the desert and make millions but that isn’t the case, I think. They do send a lot of money back home.
And, as you say, the living costs there are also quite high. So, you could get quite a high tax rate in the UAE and it could kill the incentive to live there and work there.
Correct, but I think that’s a bit of unfairness perhaps is the UAE – they do collect a lot of taxes but they do it more as a consumption tax and not as an income tax. If you rent something there it’s astronomically expensive. But they don’t just make money from oil and everything else is for free. Unfortunately, now, because we get hit with an income tax of course you can’t claim the same or you can’t claim the VAT credit as a credit against your income tax or a credit for the tax on the fuel that you pay against your income tax because it’s a different tax.
There is definitely a bit of a miss-match happening there and I do think that should definitely be arranged with Treasury because they’re right. To some extent, there’s guys abusing the system but on the other side perhaps this would be too harsh, where we’re heading at the moment.
You say that South Africans can still have their say about this legislation. How do they go about doing that? Do they lobby Parliament or how does that work exactly?
I think, and I’m not here to support one group or other, but I would definitely join Barry Pretorius’ Expat Petition Group. It’s a Facebook group that he started. I think he has over 10 thousand members and five thousand odd signatures, or thereabouts. On there is the detail on how to and who at National Treasury and SARS to write to. The first step is that you’ve got until the 18th August to do a submission. If you don’t submit then you’ve got nothing to complain about afterwards and obviously, there’s a bit of strength in numbers thing. You know if the Davis Tax Committee, I think they got 151 responses, only to the wealth tax question that was asked. If you’re only going to get 151 responses to this expat package thing then perhaps National Treasury and Parliament will say, ‘this is just going to impact a small couple of guys. Let’s not worry too much about it.’ But you have to comment if you disagree. I think that’s important.
That would mean having, potentially, thousands of responses then?
Well, I would guess so, and I think there’s obviously, a motive and economic side to it and there’s a tax technical side to it. Obviously, I will focus more on the tax technical side, in terms of to claim tax credits is sometimes just not as easy as you might think. There’s a lot of African countries where it’s very difficult to show that you’ve paid personal income tax because tax is collected through the pay as you earn system. The moment you pay as you earn, the personal tax obligations falls away. So, I hope there’s good comments. I hope there’s a good robust debate but I must just add there’s a balance to this. If Treasury feels that some guys have been paying tax absolutely nowhere, and that’s completely wrong – they are obligated to correct that position as, I guess, the market should be obligated to say, perhaps you’ve gone too far.
If this legislation goes through ultimately, and residents and citizens of SA, who are working overseas, will have to pay their fair share of tax, what kind of options will they be left with? If they don’t want to pay SA tax rates, do they ultimately have to become citizens of other countries? Do they have to properly emigrate?
Yes, I do think a lot of the guys have just simply left, in the past, and never informed anybody and not even pay capital gains tax when they left because when you leave you have to pay CGT. I do think they’re going to get forced to get their house in order. I do think obviously, a lot of them that’s not having to come back is going to use the Financial Immigration Process. That’s basically how you inform SARS and the Reserve Bank, that you’ve left with permanent intention. If you’re a non-resident these things don’t apply to you.
Of course, there’s going to be the other side as well. I guess there’s going to be some of them that just says, ‘catch me if you can’ and I certainly hope that SARS do catch them because we’re not supporting that. I guess the other part then is there’s going to be guys that’s going to start going into schemes to reduce their taxes. We’ve seen that with share schemes. Since they’ve brought in these new share scheme rules every single year, and I’m not sure if I’m 100% correct but probably it’s for about 10 years now. Every single year, they’ve had to bring in new rules to close the loopholes that was created by some practitioners in the market so, it will be an interesting time.
Very interesting stuff. Jerry, thanks a lot for chatting to me today. It’s been a fascinating discussion.
Thank you very much.