As of 1 March 2001, certain new laws regarding the taxation of remuneration earned by foreign-based employees came into effect:
• Prior to March 2001 SA was a source-based tax regime, meaning that it was assumed that in whichever country the SA tax resident earned remuneration, such remuneration was taxed in accordance with that country’s tax rules and deducted accordingly.
• As such the remuneration was not taxed under the SA tax system.
• In March 2001, SA moved to a residence-based tax regime, meaning that SA tax residents, no matter where they worked in the world, would be taxed on their worldwide income.
• This did cause issues where double taxation on the same income became a reality and as such double taxation treaties/agreements were entered into between SA and many foreign countries to avoid this problem.
• Later section 10(1)(o)(ii) of the Income Tax Act was introduced which allowed for an exemption (under certain circumstances) from income SA tax.
Section 10(1)(o)(ii) of the Income Tax Act:
• The individual had to provide employment services outside SA for 183 days, of which 60 had to be consecutive, in a 12 month period.
• There have been some Interpretation Notices issued (4, 16, 34) which explain what constitutes a “day”. (i.e. a day in transit, time of day, etc), which are worth reading.
• This section was introduced to prevent the individual from paying tax twice on the same income.
• If the exemption requirements were met, then relief from double taxation is provided by 6quat, which allows for a tax credit against the tax paid on employment income earned by the Employee in the foreign country.
• NB – In the case of non-residents (i.e. inbound employees) – they only get taxed on what they earn in SA.
Further changes were made regarding tax on foreign earnings which came into effect from 1 March 2020:
• Prior to March 2020, SA tax residents received a tax exemption on their foreign earnings if they met the “days” requirement.
• This exemption was removed and tax was due on all remuneration earned whilst in a foreign country. This resulted in many SA tax residents being potentially liable for up to 45% on their foreign earnings.
• After much debate/resistance an annual earnings/remuneration threshold of R1,000,000 was introduced. This meant that only earnings/remuneration above R1,000,000 p/a was subject to SA tax. This limit was later increased to R1,250,000 p/a. (effective March 2020)
• This meant that only earnings/remuneration above R1,250,000 was subject to SA tax.
• With the 6quat provision, a tax credit equal to what tax had already been paid in the foreign country was allowed, thus ensuring that tax on those earnings/remuneration was not paid twice.
Further changes were introduced which came into effect from 1 March 2021:
- Phasing out of exchange control treatment of individuals commenced.
- It was replaced with a more stringent verification test /process for those individuals who wanted to move more than R 10 mil out of SA – i.e more than the max investment allowance.
The new process includes:
- A risk assessment/management test;
- A more thorough check on tax status;
- Verification of source of funds;
- Compliance with anti-money laundering requirements;
- Countering terror financing initiatives and activities.
• Natural person emigrants and natural residents are to be treated in exactly the same manner from a tax perspective.
• The current restrictions on emigrants being allowed to invest, the requirement to operate a blocked account, have bank accounts, and their ability to borrow in SA, will be repealed.