Authored by: Jonty Leon, Attorney & Jean du Toit, Senior Attorney at Tax Consulting SA
National Treasury has invited key stakeholders to a workshop early next month to address continued concerns around the amended foreign income tax exemption.
The change is set to become effective on 1 March 2020.
In terms of the amended section of the Income Tax Act, South Africans working abroad will in future be taxed in South Africa on any foreign income exceeding R1 million.
This will have a major impact on the competitiveness of South African professionals and the remuneration policy of multi-national South African companies, say Tax Consulting SA’s legal experts.
Another legislative cycle
Although the workshop, scheduled for 6 March, is done post-budget, it does open the way for comments and submissions to be included in the new legislative cycle, says Tax Consulting attorney Jean du Toit.
This means if treasury accepts the comments and submissions presented during the workshop to address the concerns, the tweaking can be done before the amendment takes effect in 2020.
Major concerns back on the table
Du Toit says they want to address the substantive issues with the law change during the workshop rather than administrative concerns around the implementation of it.
“We hope and believe that the workshop will address the fact that the law as it currently stands must either be scrapped or amended.”
One if the big problems Tax Consulting has with the amendment is the inclusion of fringe benefits into the taxable income of foreign employees.
“In some instances, taxpayers are offered certain benefits that are actually absolute necessities because of the jurisdictions they work in, such as the services of a security guard or a driver if they work in a jurisdiction where this is an absolute requirement.”
However, says Du Toit, in terms of South African legislation that would be considered a fringe benefit. If this cost is included in their taxable income, the expat would easily exceed the R1m threshold set out in the act.
“Their taxable income would be unrealistically or disproportionately inflated,” states Du Toit.
Another major concern relates to the exemption-cap being expressed in South African Rand.Most expats are earning in dollars or pounds or dirhams.
“As the South African Rand weakens against these currencies South Africans are effectively paid more in the foreign currency simply because of the volatility of the local currency. ”This is something neither the employee nor employer has any control over.
Tax Consulting referred to the XE Corporation’s historical rates and notes that fluctuations in exchange rates over the past decade has been glaring. For the Rand/US Dollar it was 106%, Rand/Euro 61%, Rand/British Pound 33% and Rand/Emirati Dirham 106%.
Increased burden for employers
Many South African multi-national companies send their employees all over the world, says Tax Consulting’s attorney Jonty Leon.
Given the fact that most expats will earn more than R1 million when their remuneration package is converted to rand, they are now facing a much heavier tax burden than what they signed up for.
Expatriate employees are looking to their employers for relief. “If the employer does offer relief, it in essence affects the entire business model going forward. Expats cost of employment will be increased dramatically because of the change in legislation.”
Leon says this may lead to employers looking for local employees in the foreign jurisdictions where they operate, or more so they may source skilled people from other countries whose tax laws are “more forgiving”.
This will render South African professionals less attractive.
Leon says treasury initially proposed the entire scrapping of the tax exemption provision, but following a workshop in 2017 introduced the R1 million threshold.
However, despite this concession treasury was again inundated with submissions and comments in December last year and has set aside 6 March to focus on remaining concerns.
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