Last year, South Africans were incensed by National Treasury revoking a long-standing exemption on foreign income. However, in response to public outcry, they have proposed reinstating a limited exemption on foreign earnings.
The contention began in 2017, when the National Treasury issued the 2017 Draft Taxation Laws Amendment Bill (TLAB). This Bill proposed that the foreign employment income exemption contained in section 10(1)(o)(ii) of the Income Tax Act, 1962 (the Act) be repealed. The National Treasury’s reasoning was that the current exemption created opportunities for double non-taxation in instances where the foreign host country imposes either significantly reduced or no income tax on earners.
If implemented, foreign earned income would be subject to tax in South Africa from 1 March 2019. Section 6 of the proposed Bill also noted that the taxpayer would be entitled to claim a tax credit in South Africa in respect to any foreign tax paid.
As expected, Treasury received a number of comments opposing the repeal of foreign employment income exemption, and on 14 September 2017 issued a draft response document in relation to comments submitted on the TLAB, and report-back hearings made to the Standing Committee on Finance held in Parliament.
The Response Document contains comments from the public, which voice the following concerns:
- The tax could have a severely negative impact on finances and remittances to South Africa, especially those in lower income groups and those receiving foreign income from family members overseas.
- It could have a negative impact on foreign monies invested into family-run businesses and money spent in South Africa during visits to the country.
- The higher cost of living in foreign countries should be accounted for in the design of tax.
- The amendment may accelerate formal emigration from SA or breaking of residency.
- It could spell cash flow problems as the foreign tax credit (s. 6quat) can only be claimed on assessment (this was rejected by Treasury as employers are currently able to apply for a hardship directive from SARS, which would take foreign employment taxes into account when calculating PAYE)
As a result of the comments received from the public, Treasury has proposed to amend the Act to exempt the first R1 million of foreign-earned employment income from being taxed as income in South Africa, provided all the requirements of section 10(1)(o)(ii) of the Act are met. This includes the condition that an employee must work outside of South Africa for more than 183 days, of which 60 continuous days must be during a 12-month period. Foreign income that exceeds R1 million will be subject to income tax in South Africa. This proposal will be effective from March 2020, which gives employees working abroad time to adjust their tax affairs and employment contracts.
For specialist advice on how this proposal applies to your foreign earnings, contact us.