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Think twice before becoming non-SA tax resident to avoid double tax - expert

Aug 07 2017 05:00
Carin Smith

Cape Town - South Africa’s move to scrap the tax exemption for South Africans abroad has been slammed as “totally unjust", “highly discriminatory", and “achingly regressive” by Nigel Green, founder and CEO of deVere Group.

He is speaking out as plans are put forward by the SA Revenue Services (SARS) to domestically tax those who earn overseas - even though they would still be taxed on their income abroad too.
 
Presently, those working in another country for more than 183 days each year do not pay tax on income from overseas.
 
“The plans by SARS to drop this exemption are going to hit the many hundreds of thousands of South Africans who choose to live and work outside South Africa. The move is totally unjust and breaks the cornerstone principal of taxation: that the taxpayer receives government services for their taxes, such as healthcare, education, roads and police services,” said Green.
 
“These plans are highly discriminatory. It is simply unfair to tax someone because of their citizenship. Indeed, residence and/or territoriality are the only criteria upon which a fair income tax system should be based. This draconian move to double tax South African expats effectively shackles them to SA and they would no longer enjoy the same freedoms as almost everyone else in the world."

READ: Double tax may be on cards for South Africans who work overseas

Under these proposals, South Africans living abroad would be "persecuted", for doing so instead of being celebrated and championed, in his view.

"They are among the most important ambassadors the country has globally. They play a significant role in defining the international view of South Africa and its core values,” said Green.
 
“There are only two other countries in the world that maintain this outdated, misguided and wrong citizen-based taxation (CBT) regime: the US and Eritrea."

He said there is a growing campaign for the US to change from this system to residence-based taxation enjoyed by the rest of the world.

"It is achingly regressive for SA to be looking to adopt CBT and to do so would put the country on the wrong side of history,” said Green.
 
“The Draft Rates and Monetary Amounts and Amendment of Revenues Laws Bill is open for public comment until 18 August. I would urge all South Africans at home and overseas who care about freedom and prosperity to make their opinions heard. This move to scrap the tax exemption for South Africans who live and work overseas is not the way forward for a modern, democratic nation.”

Think twice

David Warneke, head of tax technical at BDO South Africa, says taxpayers should think twice before deciding that becoming a non-SA tax resident is a good response if a current exemption for non-South African employment income is removed.

Treasury intends removing the foreign remuneration exemption contained in the Income Tax Act. The exemption currently exempts from income tax, remuneration earned for employment services rendered outside of SA of employees who are outside of SA for a more than 183 days in a 12-month period, of which the absence must be continuous more than 60 days.

The exemption does not extend to governmental employees, employees of public or municipal entities or holders of public office.

The exemption was introduced in 2001 to prevent double taxation of employment income in SA and the host-country where the employment services are rendered. Warneke says that the reason for the proposed removal of the exemption is that it provides opportunities for double non-taxation if an employee works in a zero-tax country, for example Dubai.

“In this scenario, the income would neither be taxed in Dubai, nor in SA. This is perceived to be unfair and creates unequal tax treatment between employees in the private and public sectors," says Warneke.

If the exemption is removed the employment income will become taxable in SA since SA residents are taxed on a worldwide basis. SA will levy income tax on the income and will give a credit for taxes suffered elsewhere. Taxpayers may consider ceasing to be a SA tax resident.

“This can be achieved by ceasing to fall into the two-pronged definition of ‘resident’: ceasing to be ‘ordinarily resident’ in SA, in other words if SA ceases to be the individual’s true or real home and also ensuring that one falls under the threshold number of days present in SA in terms of the physical presence test for tax residence,” says Warneke.

“SA tax residence may also be broken if an individual is deemed to be an exclusive tax resident of another country in terms of a double taxation agreement between SA and that other country.”
 
However, Warneke cautions that one of the consequences of ceasing to be an SA tax resident is that there is a deemed disposal of one’s worldwide assets (with certain exclusions such as immovable property in SA) at market value for SA capital gains tax purposes immediately before one ceases to be an SA tax resident.

“Depending on the composition and value of one’s asset base relative to its base cost, the quantum of the capital gain triggered may be substantial. Since it is a deemed and not an actual disposal, this may create cash flow challenges to pay the capital gains tax without realising some of the assets,” says Warneke.
 
“The hidden costs of a decision to tax emigrate from SA therefore need to be carefully considered. The Draft Taxation Laws Amendment Bill proposes that the deletion of the exemption would come into effect for tax years commencing on or after 1 March 2019. It remains to be seen whether the proposal will be enacted.”

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