Discussion began amongst the expatriate community abroad following the Minister of Finance airing his intention in his national budget speech in February 2017 to remove the foreign employment exemption from the South African tax legislation.

The exemption provides that where a South African resident for tax purposes rendered services while physically outside of South Africa, should he/she be physically outside of South Africa for a period of more than 183 days in any 12 month period, of which more than 60 days are consecutive, any remuneration earned in rendering such services will be exempt from tax in South Africa.

This exemption has been part of our law since South Africa switched over to a residence based system of taxation on 1 January 2001, where South African tax residents became subject to tax on their worldwide income, to bring them in line with international practices.

Due to recent economic developments many South Africans have been encouraged to seek employment in other countries. It is very common for South African companies to second South African employees to work at foreign group companies in order for them to be able to gain additional skills and knowledge applicable to their employment.

The cost of living is usually dramatically higher when working abroad, in most cases requiring an allowance or adjustment in the employee’s remuneration. Being able to claim the foreign employment exemption is therefore sometimes quite advantageous to the taxpayer.

The current exemption is purely reliant on the source of the income being remuneration for services rendered outside of South Africa and dependent on the number of full days physically outside of South Africa. The exemption ignores the fact whether tax was paid in a foreign jurisdiction of not, making it easier for the employer and employee to administer the South African liability as they only need to keep track of their days abroad.

At the budget speech in February 2017, it was mentioned that the current exemption was 'excessively generous' and it was proposed that the exemption be adjusted so that foreign employment income will only be exempt from tax in South Africa if it is subject to tax in the foreign country. Treasury realised that in some instances, some South Africans are working in foreign jurisdictions where no tax is collected outside.

If remuneration then qualifies for the foreign employment exemption it leads to ‘double non-deduction’ which is contrary to Treasury’s original intentions. In the draft Taxation Laws Amendment Bill published on 19 July 2017, Treasury surprised all by proposing that the full exemption be repealed in its entirety from 1 March 2019.

Looking to a Double Tax Agreement (DTA) to determine whether there is any relief from double taxation also causes a problem as not all DTA’s provide exclusive taxing rights to the resident country and not all source countries have entered into a DTA with South Africa. The only option available to a South African taxpayer who is liable for tax in both countries may be to claim a foreign tax rebate where they would need to obtain proof that foreign taxes were actually paid before the taxpayer can claim relief in South Africa in respect of the taxes paid.

Certain comments were put forward to Treasury following the first draft of the Amendment bill in July and it was acknowledged that it may not be wise to repeal the exemption completely, but to include a threshold when determining the exempt remuneration.

As per the Taxation Laws Amendment Bill introduced in the National Assembly on 25 October 2017, it would
appear that Treasury has retained the foreign employment exemption but have amended it to be applicable to remuneration not exceeding R1 million per year of assessment. Any remuneration therefore earned over this threshold will be subject to normal tax in South Africa. If this Bill is passed by Parliament, this change will be effective from 1 March 2020.

The postponement of the effective date may allow expatriates, effected by the amendment, time to renegotiate current packages.

SHARON MACHUTCHON
Tax Consultant, Mazars
sharon.machutchon@mazars.co.za