All may not be lost for impacted employers and employees! Many employers and employees are impacted by the change to the foreign employment exemption. Many hoped for a Government rethink but to no avail. The change, effective 1 March 2020, results in only the first R1 million of a qualifying employees foreign earned remuneration being exempt from South African tax. Despite the obvious concerns, it remains to be seen how much additional revenue will be raised by the change. Arguably the change may do more harm than good. Likely, many expatriate employees may not be impacted as they may be considered non-South African tax resident in any event. A common misconception of becoming non-South African tax resident is that a person needs to financially emigrate from South Africa. Although a financial emigrant will lose his or her ordinary tax residence status, a person may be able to achieve non-tax resident status without having to emigrate financially. For example, if a person is deemed to be exclusively tax resident in another country, and that country and South Africa have entered a Double Taxation Agreement (DTA). Many South Africans work in countries such as the UAE and Mauritius, both of which have DTAs with South Africa. The specific facts and circumstances of a person need to be assessed (pardon the pun!) to determine tax residency. The location where the person is performing employment duties may make that person subject to tax in that country. If the same earnings are taxable in South Africa, the person can claim a credit for the tax paid in that country against his or her net South African tax liability. In certain instances, this may result in no additional South African tax on foreign employment income.
Employers will be burdened by expatriate employees working outside South Africa who do (or not, as the case may be) satisfy the qualifying criteria to claim the R1 million foreign employment earnings exemption. Especially if the same earnings are also subject to tax in another country or countries. For example, if the exemption criteria are not met and tax is also payable in a foreign country, this can place a significant cash flow burden on the employer and/or employee. The taxpayer may potentially apply to SARS for a hardship directive to claim a credit for the foreign tax paid in determining the South African tax payable. However, the specific documentation that SARS will require to issue such a directive remain uncertain. The Minister today acknowledged these concerns and announced its intention to workshop the concerns.