03 September 2012
Posted by: TaxFind™
Mahomed Kamdar, Technical Advisor at SAIPA addresses your tax-related questions.
South Africans working abroad and exempted foreign employment income
Facts given:The taxpayer manufactures products, which are sold to wholesalers and retailers, and intends launching an Incentives Rewards Programme as a marketing initiative in order to increase the sales of its product. The taxpayer is employed and paid by a South African company; The taxpayer works outside South Africa for 3 consecutive years and spends 20 days per year in South Africa; The taxpayer receives rental income and interest from a South African source.
Will the taxpayer be taxed in South Africa or will the taxpayer be taxed in the host country?
If the foreign employment income is exempted in South Africa, how will the South African employer treat this income in the IRP5 certificate? How must this income be disclosed in the annual return?
The tax practitioner, on behalf of the taxpayer, would have to determine whether Section 10(1)(o)(ii) of the Income Tax Act is applicable to the taxpayer. This Section exempts any remuneration received by or accrued to a person if it is in respect of services rendered outside of South Africa for, or on behalf of, any employer, provided that person was outside South Africa for the following periods:
• For a period or periods exceeding 183 full days in aggregate during any twelve-month period; and
• For a continuous period exceeding 60 full days during that twelve-month period.
• The services were rendered during a period or periods of absence from South Africa – payment must relate to work to work done outside South Africa.
‘Remuneration’ for this section of the Act includes salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee,emolument or allowance, including fringe benefits and any gain made from the disposal of equity shares acquired in terms of abroad-based employee share plan.
The payment must relate to employment – independent contractors and self-employed person do not benefit from this exemption.In other words, the taxpayer must render services abroad in terms of an employment contract.Further clarification is required with reference to CC and companies.If an entrepreneur established a CC or company, of which he/she is a member/director, the use of a separate entity creates the required employer-employee relationship.The restriction would more likely affect partnerships and sole proprietors.
Government employees cannot benefit from this exemption
Section 10(1)(o)(ii) of the Income Tax Act exempts remuneration received under the aforementioned circumstances.However, it is likely that the taxpayer will still pay tax in the host country as per the host’s domestic tax legislation, as the source of that income would generally be determined with reference to where the person was when providing services or engaged in employment activities.
If the taxpayer incurred medical cost (contribution to medical aid) in the host country during this period, it is likely that such cost incurred during this period will be deducted as per the taxpayer host domestic tax policy.
The tax practitioner and the taxpayer are further reminded that tax payments to the host country during the aforementioned period cannot be claimed as a deduction from the South African Tax Authority. The local tax authorities have declared such income as`exempt’ – expenses incurred to earn `exempt’ income cannot be claimed as deduction from the South African Tax Authority.It is important that the employer, satisfied that section 10(1)(o)(ii)is applicable, elects not to deduct employees’ tax. If subsequent revelation proves otherwise, the employer will be held liable for the employee’s tax not deducted.
The exemption does not specify how the salary must be paid with reference to location of the banking institution and the type of currency.The only requirement is that the aforementioned requirement, in terms of qualifying days outside the Republic and nature of employment services to be rendered, must be honoured.The remuneration from the foreign employment must be reflected under the relevant code on the IRP 5 certificate of the taxpayer.
No directives are issued with regards to this exemption. It must be declared in the relevant section of the taxpayer’s income tax return that deals with income considered not to be taxable.Proof, such as a passport and an employment contract, may be requested from the taxpayer in support of the exemption.The IRP 5 code for this non-taxable income is 3651.If the IRP 5 code is incorrect,taxpayers would experience a difficulty in claiming this exempted income.The reason code for the non-deductibility of tax in the case of exempt foreign employment income is 4105.The employer should distinguish between qualifying foreign source income, using code 3651, and remuneration received for services performed while in the Republic that does not qualify for the exemption, and code 3601 should be used for this portion of local source income.The exemption is not a blanket exemption from all remuneration,but only applies with regards to the employment income received or accrued while outside of the Republic.
The exemption does not apply to rental income, interest earned,or other income from South African sources, and will be taxed in South Africa.The income tax exemption available for foreign employment income does not extend to resolving liability under the Unemployment Insurance Contributions Act 4 of 2002 or the Skills Development Levy Act 9 of 1999 for the taxpayer/employee.These Acts do not provide for the same exemption.
Source: By Mahomed Kamdar, Technical Advisor at SAIPA (Tax Professional)