Confusion of expatriates over tax status as amendments loom
The taxpayers who will be most affected by the legislation are those in the Middle East or countries where there is no double taxation treaty.
As South Africans working outside the country prepare for new changes to the income tax law, which are due to come into effect from March 2020, many do not know their tax status or what the changes will mean for them.
Dubbed “the expatriate tax,” the changes mean that South African tax residents working abroad will only be exempt from tax on the first million rand they earn abroad. Subsequently, they will be required to pay taxes on their foreign income. There is still a lot of confusion as to who will have to pay the tax and whether the tax can be avoided through financial emigration.
The issue is complex and expats should verify their tax status as the new amendment specifically applies to an exemption granted to South African tax residents.
Double Taxation Agreements (DTAs) are internationally agreed pieces of legislation and South Africa holds them with various countries to define the taxing rights they have over expatriate taxpayers. DTAs ensure that a taxpayer is not unfairly taxed both in South Africa and in the corresponding country involved in the agreement.
When a taxpayer is registered as a tax resident in both countries and a DTC is in place, the DTC will determine where and how a taxpayer must pay tax on income received.
Changes to the expatriate tax can have serious consequences. The law and SARS may consider your total compensation and not just your salary, which means SA tax residents working in certain foreign countries and receiving additional benefits such as security, accommodation, transportation could be taxed on the total value of the package.
The taxpayers who will be most affected by the legislation are those in the Middle East or countries where there is no double taxation treaty. Some Middle Eastern countries have double taxation agreements with South Africa, but the problem is that a lot of them don’t have a tax revenue office, which means you can’t get a certificate. tax resident to prove to SARS that you are a tax resident there.
Dubai is one of the countries where you can get a tax residency certificate, but it’s expensive. If you have to pay around 2,000 dirhams per calendar year for a tax residency certificate, you may want to consider financial emigration because of the cost over the next 10 years.
Many South Africans living in the Middle East, mainly Dubai, Saudi Arabia, Bahrain and Qatar, could be affected.
People who work in Africa under contract but still have their home, family and tax residence in South Africa will also be affected – they cannot change their tax residence unless they move their family out of the country.
Most of Africa is covered by double taxation agreements, but if a couple is based in South Africa and one partner works mainly outside the country in Africa and the other works in South Africa, they will most likely both be considered SA tax residents.
Around the world, around 40 countries have double taxation agreements with South Africa. Countries that do not have a double taxation agreement with South Africa include much of Asia, the Middle East, and South America.
Whether you work in a country without a double taxation treaty or in a country where there is a double taxation treaty, you should always know what your correct tax status is with SARS.
If your tax status is incorrect at SARS, you must make the change before the end of February 2021. The law will come into force on March 1, 2020, but you still have several months to backdate your information and submit your return before the end of the year taxation. Otherwise, SARS will come after you. SARS marked everyone as a South African tax resident unless you can prove otherwise.
We assist people who are clearly tax residents elsewhere, ensuring that everything is correctly declared to SARS and that the exit tax has been paid. This can be done without emigrating financially.
If you have a dual passport, you must prove that you are tax resident elsewhere. It’s about communicating with SARS. A common problem with people working outside the country is that when they tell SARS their current address, they are using their South African address. If you give SARS a South African address, they will think you are a South African tax resident.
If SARS detects a problem and suspects tax evasion, they can collect a 200% tax penalty.
Most revenue offices talk to each other. There are over 140 banks around the world reporting transactions to SARS, which knows all of this cash flow. SARS will punish tax evaders with administrative penalties.
There are two structures for penalties – fixed percentages and per problem incident. The fixed percentages range from 20% to 200%. Then there are administrative penalties for unpaid and late declarations. These penalties are billed per incident, per month up to a maximum of three years. These could range from R250 to R16,000. SARS will get its money from administrative penalties, if not taxes. Once you have a track record, they scrutinize you.
People living abroad, who have not told SARS they have left the country and may still have an active tax ID number, are definitely at risk. Many people don’t make sure their tax number is no longer active.
Some people living abroad permanently may still need a South African tax number. If you own a property or are expecting future income, such as an inheritance, if you still have business interests in South Africa generating income or if you have investment portfolios in South Africa and they are generating income, you are required to have a tax number.
SARS assumes that what happened the previous year will happen the following year. If you work for two months and file an income tax return for two months, the next year SARS thinks you are still earning an income.
Another problem that arises is that if a lump sum is paid, SARS considers that as income and wants a return – people don’t think they have to make a return because it has already been taxed.
It’s important to be proactive, to know your tax status, what you might be responsible for, and to sort out your issues with SARS.
Remember, be proactive, if you go to SARS before SARS hits you, the penalties will be lighter. BM