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What SARS could gain, and taxpayers lose, with scrapping of 183-day exemption

20 July 2017   (0 Comments)
Posted by: Author: Maarten Mittner
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Author: Maarten Mittner (Business Live)

The South African Revenue Service (SARS) could bring in significant extra revenue with its plan to scrap the 183-day exemption on foreign employment income, but it will be tough on individuals and employers, tax analysts say.

If the estimated 50,000 South African workers in the Middle East were brought into the tax base, "the revenue could be considerable, bearing in mind the present local 45% marginal rate, or even at an average 35% rate", Bravura analyst Kemp Munnik said on Thursday.

In practice, where an employee falls into the maximum 45% tax bracket and pays 25% tax in a foreign country, SARS will now collect the difference of 20%.

Munnik said the only real relief taxpayers would have was claiming a tax credit under Section 6quat of the Income Tax Act, or under an existing double-taxation agreement.

"Changing the 183-day exemption will be detrimental to individuals as they will be forced to come back to SA where they may not have a job," he said.

Employers might also be affected in that they would not be able to place expats in another country. "A place where lower or no taxation is due would clearly be preferable," Munnik said.

The 183 rule is based on the exemption principle. Any South African resident who has spent 183 days in any 12-month period working outside SA is completely exempt from local tax, irrespective of whether the South African pays tax or not in the foreign country.

Now, any offshore income on which no tax was paid will become taxable in SA.

National Treasury published draft tax law amendments on Thursday in which it proposed taxing all South African 

residents on their worldwide income and to do away with the 183-day stipulation in its entirety, and not just raise tax if a resident was not subject to any foreign tax, as was mooted earlier.

In its motivation, Treasury said it has come to its attention that some South African residents paid no tax at all in certain Middle Eastern countries, notably Dubai.

At the same time, they paid no tax in SA, which was judged to be unfair as it amounted to double non-taxation.

The proposed amendments are set to be implemented from March 2019, but the deadline for comment is in a month’s time on August 18 2017.

Mazars tax consultant Tertius Troost said the amendment was sure to attract a lot of reaction before the deadline. "The proposed amendment will most definitely affect South African tax resident employees working in low-tax or tax-free jurisdictions," he said.

Tax practitioners are already looking at ways to alleviate the proposed burden, should the law take effect, but the options are limited for South Africans abroad, said Tax Consulting partner Jerry Botha.

"One alternative would be to emigrate, in which case there will be a deemed disposal capital-gains tax event," he said.

Botha said SARS probably anticipated this move in 2016 as the tax return now has a specific disclosure on this option, which had not existed previously.

Another possibility would be establishing tax-treaty residency in another country, but it is not that easy to get a tax residency certificate somewhere else. "Anyone who has been through a SARS process on this will know how complex the issue may become," said Botha.

The analysts agreed the only option may be to come home, as even the Section 6quat stipulation comes with some complexities. The income earned on which the foreign tax was paid has to be included in South African taxable income, based on foreign-exchange considerations, and then deducted. And the credit may not exceed the normal South African tax levied on the foreign income.

This means some of the tax theoretically paid in a foreign country will be forfeited, despite the credit mechanism being in place.

The South African Institute of Tax Professionals said it hoped to influence some of the present amendments by presenting inputs from members at the planned public hearings before the standing committee on finance.

Workshops with Treasury are planned in September where there will be engagement with all the stakeholders.

This article first appeared on businesslive.co.za.


 

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