South Africa tax reforms: what you and your assignees need to know

In general, an individual deemed a resident for tax purposes is taxed on worldwide income, while a non-resident is only taxed on income sourced or remitted to the country in question. However, in South Africa things are slightly different - tax residents pay no tax on income earned abroad if they spend more than 183 days in aggregate (including at least 60 consecutive days) outside of the country, so long as the work is performed during this period of absence. Individuals with a permanent home in South Africa are considered tax residents, so it follows that South Africa outbounds can avoid paying tax in South Africa on income earned on assignment. This includes salaries, bonuses, allowances and taxable benefits. However, global mobility professionals should be aware that this will change from 1 March 2020.

What is the change?

Effective from March next year, only the first ZAR 1 000 000 of foreign employment income will qualify for the exemption. Income in excess of this threshold will be taxed at the applicable marginal rate of tax (up to 45%).

What is the impact?

Clearly, this depends on the income level. Those earning below the ZAR 1 000 000 threshold (which is around USD 67 000) will be unaffected. Higher-earning assignees will now pay tax on the excess. In 2019/20, taxable income over ZAR 708 310 is taxed at 41%, increasing to 45% above ZAR 1 500 000. Furthermore, given the scope of the exemption, tax may now be due on many assignment-related benefits. The table below illustrates the basic impact on an individual earning ZAR 2 000 000 (using 2019/20 tax rates):

	2019/20	2020/21
Gross income	2 000 000	2 000 000
Foreign income exception	2 000 000	1 000 000
Taxable income	0	1 000 000
Tax	0	312 820

Is double taxation an issue?

Potentially. As a South Africa outbound would probably retain an abode in the home country, and is likely to be in the host country for at least 183 days, a double taxation liability is quite feasible. South Africa has concluded many double taxation agreements – over 70 – which may offer relief. While these agreements are bilateral, and therefore uniquely framed, the country of source typically enjoys the first right to tax income, with the other jurisdiction providing relief in the form of a foreign tax credit (FTC).

That said, a unilateral tax relief exists under South African law in what is commonly referred to as ‘Section 6quat’. This is limited to the lesser of foreign tax paid or South Africa tax due and may drastically reduce the tax due on foreign income in South Africa. The table below takes the previous example but includes an FTC, where the applicable foreign tax rate is assumed to be 30%:

	2019/20	2020/21 (no FTC)	2020/21 (FTC)
Gross income	2 000 000	2 000 000	2 000 000
Foreign income exception	2 000 000	1 000 000	1 000 000
Taxable income	0	1 000 000	1 000 000
Tax	0	312 820	312 820
FTC	0	0	300 000
Total tax due (SA)	0	312 820	12 820

The impact of the FTC may be even more drastic, as it is currently unclear if the calculation should or should not consider the ZAR 1 000 000 exemption. The above calculation deducts it from taxable income before the 30% foreign tax rate is applied, which limits the amount of FTC available. If it was not included, the available FTC would completely eliminate the tax liability In South Africa.

In practice, things are unlikely to be this simple. By law, an FTC may only be claimed if foreign taxes are proved to be payable. It could be very difficult for a taxpayer to provide such proof, even if they are on a foreign payroll; withholding does not constitute a final tax, which is what the authorities are required to know.

At the time of writing, the FTC is not currently accounted for in South African payroll systems; it is instead claimed on an individual’s tax return. This could lead to short-term cash flow issues for an assignee, unless the employer applies to the South Africa Revenue Service for a directive that allows payroll withholdings to reflect the potential FTC available. Either way, a tax return must be submitted.

Conclusion

Global mobility professionals may wish to review the viability of assignments on a case-by-case basis. Assignments to locations with lower rates of tax relative to South Africa (or no income tax at all) would become more expensive, since any FTC would not offset the tax due on the foreign income in South Africa. The top marginal rate of tax in South Africa is relatively high (45%), so many moves could fall into this category. On the other hand, assignments to high tax jurisdictions may see a negligible net impact owing to the FTC completely offsetting tax due in South Africa. Either way, the administrative burden for moves out of South Africa will most likely increase in the near future.

Assignees made worse off might consider if they should remain tax resident in South Africa, since non-residents are not taxed on income sourced abroad. In practice, breaking tax residency will not be easy; the authorities will assess each case and consider a wide range of factors including habitual abode, business and personal interests, nationality, family and social interests. Although a resident individual can become non-resident after spending at least 330 continuous days outside South Africa, is this realistic for an individual on a temporary assignment? Would even a permanent transfer lead to residency being broken if personal interests remain in the country? These questions will all need to be considered by both global mobility teams and the assignee alike.

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