Currently, s10(1)(o)(ii) of the Income Tax Act, No 58 of 1962 (Act), states that if a South African resident works in a foreign country for more than 183 days a year, with more than 60 of those days being continuous, foreign employment income earned is exempt from tax, subject to certain conditions. This exemption is only available to employees from the private sector. Early this year in the 2017 Budget, it was proposed that the exemption be adjusted as it was “excessively generous” for those that still benefited from it, ie private sector employees. It was proposed that foreign employment income will only be exempt from tax if it was subject to tax in the foreign country.
A bit of history
In 2001, when South Africa changed from source to residence basis of taxation, s10(1)(o)(ii) was introduced to provide tax relief to South African tax residents who rendered services outside of South Africa. According to the Explanatory Memorandum on the Revenue Laws Bill, 2000 (2000 Memorandum), this move was to bring South Africa in line with internationally accepted practice. At the time, the s 10(1)(o)(ii) exemption did not apply to certain public sector employees. However, s10(1)(o)(ii) was again revisited in 2011 when the source rules were unified and s9 of the Act was significantly amended. In terms of the amendments to s9, the source of services provided to or on behalf of the various tiers of government were deemed to be from a South African source, irrespective of where those services were rendered. Consequently, s10(1)(o)(ii) was also amended by inserting a proviso excluding all public sector employees from the exemption.
The proposal in the Draft Taxation Laws Amendment Bill, 2017 (Bill), goes further than the proposal stated in the 2017 Budget. In terms of the proposal in the Bill, the exemption is not merely being adjusted, but proposes that the entire exemption in terms of s10(1)(o)(ii) be repealed. Relief from double taxation will still be available in terms of s6quat of the Act.
The reasons behind this move are twofold:
- The main purpose of the exemption was to prevent double taxation occurring, considering that a limited number of Double Taxation Agreements (DTAs) had been concluded by South Africa and other countries at the time. National Treasury has realised that this exemption creates opportunities for double non-taxation where foreign countries do not impose income tax.
- Secondly, unequal treatment has been created between public and private sector employees.
Role of the DTAs and practical considerations
Inasmuch as the DTAs eliminate double taxation by allocating taxing rights between source and resident states, the resident state is not precluded from taxing the same income that the source state is allocated a right to tax. In instances where the resident state (the state where the taxpayer is a tax resident) imposes tax in respect of the same income that the source state (the state where the services are rendered) has a right to tax, the resident state is required to provide relief by way of a foreign tax credit or exemption. The foreign tax credit is similar to the rebate available in terms of s6quat.
In practice, it could happen that where a person employed by a South African employer renders services abroad, such person’s salary will be subject tax in the source state and in South Africa, before the employee can claim the relief available in terms of s6quat. The effect of this is that employees will likely be out of pocket until such time that they can claim a refund from SARS. It is important to note that the proposed amendment will come into effect on 1 March 2019 and will apply to years of assessment commencing on or after that date.