CALM IN THE STORM: DTA’S PROVIDE QUIET RESPITE FOR EXPATS

The lockdown in South Africa followed shortly after the introduction of the expat tax limitation in section 10(1)(o)(ii) of the Income Tax Act. Previously, the foreign employment income of South Africans who spent more than 183 days outside of South Africa in a 12-month period, of which 60 were continuous, would be wholly exempt from normal tax in South Africa.

From 1 March 2020, however, South African residents working abroad will have to pay the tax on their foreign employment income over R1,25 million to SARS.

With the first “expat tax” provisional tax payment due in August, this will certainly have been keeping many South African expatriates up at night. For good reason too – with a deepening shortfall in revenue collection, now catalysed further by the worldwide Covid-19 pandemic, a key part of SARS’ focus will be aimed at South Africans abroad as a source of potential revenue.

From August 2020, SARS has announced that they will be issuing “auto-assessments” for a significant number of taxpayers, based on information sourced from third parties. This means that a taxpayer could be prompted from September 2020 to submit the provisional tax return correctly, as incorrect disclosure will potentially result in a SARS audit.

When it rains it pours, and it is evident that there is no longer any place to hide for expatriates.

Silver linings on a dark cloud

For many South African expatriates, this tax law change could result in their living and working abroad no longer being a viable option anymore. This is more so the case where an expatriate does have an intention to return to South Africa at some point in the foreseeable future and, as a consequence, cannot undergo the financial emigration process.

The good news, however, is that one may still be able to claim relief from South African tax on their foreign income if there is a double taxation agreement (DTA) in place between South Africa and the other country.

To correctly apply DTA relief in respect of their foreign-earned income, the taxpayer will need to consider which country will actually have the right to tax their income. In some cases, this may mean that certain categories of their foreign income are non-taxable in South Africa. In other cases, this means that all of the expat’s foreign income is non-taxable provided they are deemed to be a non-resident in South Africa for purposes of the DTA.

Where a DTA is applied by a taxpayer to be deemed non-resident for tax purposes in South Africa, regard must be had to the ‘tie-breaker test’ usually contained in Article 4. This considers the various factors outlined in the DTA against the factual circumstances of the taxpayer, to reach the outcome that tax residency should be assigned to the other country. As no two cases are ever exactly alike, this means that the merits of each case should be examined to determine whether the taxpayer will qualify for this relief.

The DTA route is possibly the most under-utilised form of tax relief which is often available to expatriates. However, relief under a DTA will not automatically apply, but must be properly claimed in one’s tax return. SARS may further require the taxpayer to furnish documents and information to support the tax position taken.

Therefore, the application of DTA relief must be carefully considered and correctly applied by the taxpayer in each specific case, and they must further seek to ensure that they are fully compliant in their returns for when SARS comes knocking.

Staying ahead of the curve

The onus is on the taxpayer to prove their eligibility for relief and substantiate the tax position taken, and they should therefore ensure that they take the right actions and have the right documentation in place to effectively mitigate the South African tax exposure in respect of their foreign income.

Expatriates should prepare for this well in advance, as SARS may request you to substantiate your tax position taken. These requests are subject to strict timelines, which may prove to be an impossible hurdle given that necessary cooperation with foreign tax revenue authorities is also a difficult and time-consuming process in and of itself.

With it no longer being possible to avoid scrutiny from SARS by simply keeping a low profile, a DTA may come to the aid of a great deal of South African expatriates in weathering the turbulent times still ahead.