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Foreign Tax Affairs

24 July 2017   (0 Comments)
Posted by: Author: Nicci Courtney-Clarke
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Author: Nicci Courtney-Clarke (nicci@taxtim.com)

How to figure out how much tax you need to pay if you recently worked overseas.

 

 More and more frequently, practitioners receive queries from taxpayers who spend part of the year working overseas for a foreign employer. For example, they may have been seconded for part of the year to Dubai to work on a short-term construction contract. This raises some confusion as to how the foreign earnings should be treated for tax purposes on home soil.

 

The general rule is that South African taxpayers are taxed on their worldwide income. However,

section 10(1)(o)(ii) of the Income Tax Act offers a list of conditions which allows for income earned (or at least a portion of it) for services rendered outside South African borders to be exempt from income tax.

 

When is foreign employment income not taxable?

 

The 183-day/60-continuous-day test is applied to determine whether your foreign income is exempt from tax. To qualify for the exemption, the following conditions must apply:

  • You must be a South African tax resident
  • You must have a formal employment contract with a foreign employer
  •  You must spend at least 183 days (about six months) of a consecutive 12-month period outside South Africa, rendering services to your foreign employer
  • At least 60 of those 183 days must be continuous or unbroken

Let us now clarify the points above.

 

Firstly, this exemption applies specifically to employees. If you work overseas as an independent contractor or are self-employed, this section of the Income Tax Act does not apply to you.

 

Secondly, a “day” means 24 hours. The 183 days include all calendar days and do not only apply to work days. Therefore, weekends, public holidays, annual leave days, sick leave days and rest periods (as required under the specific terms of a contract of employment) which are spent outside South Africa will also be included for the purpose of calculating whether or not the 183-day condition has been met.

 

It is important to note that the individual must be in employment outside South Africa for the days to qualify. For example, if you spend 160 days working overseas before your contract ends and you then take a 30-day holiday overseas, the 30 days will not count towards the 183-day requirement.

Consequently, you will not have met the conditions required to exempt your foreign income from South African tax.

 

Lastly, the consecutive 12-month period is not necessarily a calendar, financial or tax year. It is any period of 12 successive months. Both a forward and backward-looking approach can be followed.

This means that you can check whether you qualify by first looking at when your contract started and then working forwards for 12 months to determine whether the 183-day and 60-continuous-days conditions were met. If so, then you qualify for the exemption. However, if the conditions were not met, you can look at the last day of your employment contract and then work backwards 12 months to see whether the 183-day and 60-continuous-days conditions were met in the new 12-month period.

 

 

How SARS works out the non-taxable portion of remuneration

 

It must be noted here that only remuneration received for work performed outside South Africa during the 12-month-qualifying period is exempt. This does not mean that all remuneration received during the 12-months period is exempt. Remuneration received for services rendered in South Africa during a qualifying 12-months period will still be subject to South African tax.

 

SARS applies the following apportionment calculation to work out the exempt amount of foreign income: (Working days outside South Africa for the specific period / total work days for the period) x remuneration received for the period.

 

For the above formula, it is important to note that work days only refer to days where services are rendered and, therefore, exclude weekends, public holidays and leave taken. Furthermore, the period refers to the full period during a year of assessment over which a taxpayer is required to render services outside South Africa.

 

Hypothetical scenario

 

Julia is employed by a South African subsidiary of a multi-national company. She was requested to travel to Zurich to assist with the setup of a new Swiss office for the company. She left South Africa on 1 May 2015 and commenced work on 2 May 2015. Julia was contracted to work in Switzerland until 19 December 2015. The subsidiary company in Switzerland paid Julia a total of R650 000 remuneration for this period. On 20 December 2015, Julia departed from Switzerland to return to South Africa.

 

During her contract period in Switzerland, Julia returned to South Africa three times to assist her local team with a project. These dates (including the travel times) were as follows:

  • 22 June to 6 July
  • 30 August to 7 September
  • 11 to 20 November

In addition, she took three days’ annual leave from 17 to 19 November during her third trip to South

Africa.

 

The number of calendar days for which Julia worked in Switzerland

 

 

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Total

2 May to 21 Jun

30

21

 

 

 

 

 

 

51

7 Jul to 29 Aug

 

 

25

29

 

 

 

 

54

8 Sep to 10 Nov

 

 

 

 

23

31

10

 

64

21 Nov to 19 Dec

 

 

 

 

 

 

10

19

29

198

 

The total remuneration received by Julia for the services rendered from 2 May to 19 December in

Switzerland was R650 000.

 

Let us first test the 183-day and 60-continuous-days rule. The 12-months period used to test whether this condition is met could either be:

  •  Working forwards from the start of the contract, i.e., 2 May 2015 to 1 May 2016; or
  •  Working backwards from the end of the contract, i.e., 20 December 2014 to 19 December 2015.

 It is clear from the table that this test has been satisfied and a portion of Julia’s foreign income of R650 000 will qualify for exemption.

 

Apportionment calculation

 

Work days during the period

Total work days during the period

Actual work days outside South Africa

Actual work days in South Africa

2 May to 21 Jun

36

36

22 Jun to 6 Jul

10

10

7 Jul to 29 Aug

40

40

30 Aug to 7 Sep

5

5

8 Sep to 10 Nov

46

46

11 Nov to 20 Nov

8

5**

21 Nov to 19 Dec

21

21

Total

166

143

20

** The three days of annual leave will reduce the work days in the calculation.

 

The portion of Julia’s remuneration that is exempt from normal tax in South Africa is calculated as follows:

 

Work days outside SA for the period = 143

Total work days for the period = 163 (166 days less the three leave days)

Remuneration for the period = R650 000

 

= 143/163 x R650 000

= R570 245.39

 

Of the total remuneration of R650 000 earned by Julia, while she was employed by the Swiss subsidiary, R570 245.39 relates to services rendered in Switzerland during the 2016 tax year and will be exempt from normal tax in South Africa. The remaining R79 754.61 relates to services rendered while she was in South Africa and is subject to normal South African tax. It is irrelevant that this amount was received while Julia was working for the Swiss entity.

 

Steps to take should a taxpayer be working overseas

 

In most cases, the onus will be on the employee to do their annual tax return for a refund of the taxes paid. This is because most employers will take the safer route of withholding tax, rather than being brave enough to apply the exemption themselves.

 

In all instances of foreign employment and related travel, it is worthwhile to have a schedule of the days in and out of South Africa prepared, along with your tax return. SARS will also want a copy of your passport, showing the various entries and exits, to substantiate your claim.

 

If you are working for a foreign company outside South Africa for extended periods of time, you would be wise to familiarise yourself with the tax guidelines and implications, especially those related to the qualifying criteria and apportionment calculation for tax exemption. Jetting back and forth may impact your ultimate tax liability. So, think twice before you book that plane ticket home.

 

Proposed changes to foreign employment in the recent budget speech

 

One amendment proposed by the finance minister in February 2017 seeks to exempt foreign employment income from tax in South Africa only if it is subject to tax in the foreign country in which it was earned. No details were given regarding the rate of tax imposed in the foreign country. Therefore, it is unclear at this stage whether, for example, a 10% tax rate in the foreign country would sufficiently satisfy National Treasury to allow the section 10(1)(o)(ii) exemption.

 

Often, companies entice employees to leave friends and family to work in foreign destinations by offering them attractive salary packages with favourable tax structures due to the section 10(1)(o)(ii) exemption. This could all change if the proposed changes are implemented. We will have to wait and see how this plays out. Despite whatever news you may hear in the media related to this proposed change, the law still stands and applies for the 2016/17 filling season.

 

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This article first appeared on the July/August 2017 edition on Tax Talk. 


 

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