Exempt Employment Income – Foreign Employment

transfer pricing 102In terms of current practice, remuneration derived from services rendered outside of South Africa is, subject to certain requirements, exempt from normal tax in South Africa in terms of section 10(1)(o)(ii) of the Income Tax Act, No. 58 of 1962 (the Act).

The general rule is that income earned by a tax resident of South Africa from the rendering of services anywhere in the world will be included in ‘gross income’ as defined in section 1(1) of the Act. Notwithstanding the general rule above, certain exemptions are provided for, inter alia, in section 10(1)(o) of the Act in respect of remuneration which would likely have been subject to the deduction of employees’ tax under normal circumstances.

The exemption provided under section 10(1)(o)(ii) will apply in respect of services rendered outside South Africa for or on behalf of any employer, as long as the individual is outside South Africa for a period or periods exceeding 183 full days (calendar, not working days) in aggregate, during any twelve month period commencing or ending during a tax year. In addition, the exemption will only apply if, during the 183 day period, there was at least a 60 day continuous period of absence from South Africa.

The onus is on the taxpayer to prove his absence from South Africa for a period and/or periods complying with the requirements of section 10(1)(o)(ii), as well as the fact that such absence was attributable to him rendering services outside of South Africa. But what about periods spent voluntarily abroad, even where the individual was in full time employment? A situation that often arises is where employees render services on a rotation cycle, for example two weeks offshore and two weeks onshore having regard to the specific type of industry the employer operates in. The employer may require, due to health and safety concerns, that employees take time off (outside of normal leave days), which the employees may decide to spend offshore rather than returning to South Africa. In spending the voluntary days offshore, the employee may ensure that the 60 day continuous period, under section 10(1)(o)(ii), is met.

Interpretation Note 16 (IN16) specifically provides that “weekends, public holidays, vacation and sick leave spent outside the Republic are considered to be part of the days during which services were rendered during the 183 day and 60 day periods of absence”. On the basis that the aforementioned interpretation is correct in calculating the 183 day or 60 day continuous periods, it should be irrelevant as to whether an affected individual decides to spend a voluntary period abroad and, in so doing, complies with the requirements of section 10(1)(o)(ii). Any rest period (whether voluntary or compulsory) will be deemed to be included in the calculation of the 183 day or 60 day continuous periods for purposes of s10(1)(o)(ii).

A contrary application of section 10(1)(o)(ii), for example, some form of apportionment methodology for time spent in and outside South Africa on rotation, would likely be incorrect and also against ‘practice generally prevailing’, having regard to IN16. Taxpayers making use of the exemption under section 10(1)(o)(ii) are reminded to exercise caution in ensuring that all requirements are met and possible future changes are taken cognisance of.

Cliffe Dekker Hofmeyr
ITA: Sections 1(1) – definition of gross income; Section 10(1)(o)(ii)
SARS Interpretation Note 16