South Africans who are working abroad need to take note of a section in the Income Tax Act that allows them to claim a credit on their South African tax liability from any foreign taxes paid on the same income.

Section 6quat is a provision in the South African tax law, which allows you to claim a tax credit against your South African taxes on foreign-earned income, for any foreign taxes paid on the same income.

On 1 March 2020, the foreign income tax exemption, which until now has allowed for a full exemption on foreign-earned income, will be capped at R1 million and any amount above that will form part of the taxpayer’s South African tax liability.

Whilst section 6quat can be complex and is subject to various rules, it operates on two very basic international tax law principles.

“The first is that your country of source (where the income was earned) has the first taxing right, and your country of residency (South Africa) has the secondary taxing right and must give credit for taxes paid in the other country.”

The second principle is that you should not be taxed twice on the same income, resulting in double taxation.

Taxpayers often “understand” double taxation to mean that you cannot be taxed in one country because you are already taxed in another country.

This is incorrect, as the principle simply means that one country must give credit for the taxes paid in the other country. However, the process is not always seamless.

The standard of proof for the taxpayer is quite high. The South African Revenue Service (SARS) typically wants to see either a certificate from the employer showing tax that has been withheld, or a tax assessment filed by the taxpayer in the foreign country.

“Without either of these two documents, SARS is likely to disallow the credit, which means the taxpayer must file an objection and follow a dispute resolution process.”

The credit system will become of more importance from March next year to South African taxpayers working abroad.

Many have been enjoying the full tax exemption on foreign-earned income if they have been working for at least 183 days of a consecutive 12-month period outside South Africa. At least 60 of those 183 days must have been continuous.

Going forward they will have to pay tax in South Africa on foreign employment income above R1million; and claim a credit for any foreign taxes paid.

The impact on taxpayers will depend on whether the taxpayer can break tax residency and, if not, on the level of taxes paid in the foreign country.

“We recommend that taxpayers and employers perform their computations upfront to ensure there are no end-of-year surprises.”

Tax Consulting foresees that most expatriates will continue to be paid by their offshore employer and pay taxes in their host country, where they physically work. They will need to file provisional tax returns where their foreign tax credits are less than their South African obligation.

South African residents who earn remuneration for employment services rendered abroad must carefully consider their options, prior to the amendment coming into effect.

This includes whether they should undergo financial emigration or break tax residency using a double tax agreement. Taxpayers who intend to claim the section 6quat credit must obtain sufficient proof of foreign tax paid.

“The key is to proactively plan their approach, and especially take care of the tax payable on fringe benefits; where SARS and SARB have not given tax relief we have hoped for.”