It is common practice in many multinational organisations for employees to render services in more than one country. In the case of South African tax residents working abroad on long-term assignments, the recent announcement in the 2013 budget regarding proposed changes to the foreign earnings exemption may potentially affect their South African tax liability in relation to foreign-earned remuneration.
In principle, South African tax residents can be taxed in South Africa on their worldwide income. However, in the case of the assignment of employees abroad for more than six months, there is an income tax exemption – generally referred to as the foreign earnings exemption – which may apply to the resident's foreign earnings. This exemption does not apply to independent contractors working abroad.
Specifically, the exemption currently applies where a South African resident employee renders services outside South Africa for or on behalf of any employer. Remuneration (including attributable share gains) derived by an employee from services rendered offshore are exempt from tax in South Africa, provided that:
- the employee physically renders the services outside South Africa for a period exceeding 183 full days in total during any 12-month period, of which 60 days must be continuous; and
- the services are rendered during that period.
The foreign earnings exemption currently applies irrespective of whether the employer is resident or non-resident.
If this exemption is applicable, the South African resident pays no income tax in South Africa on such qualifying foreign earnings. However, tax may be payable in the jurisdiction in which the services are rendered on a source basis, unless double tax treaty relief applies.
The 2013 Budget Review stated that cross-border salaries give rise to special issues, and that a tax amendment in this regard is planned for the upcoming tax legislative cycle. The Budget Review further stated that South African residents are generally subject to worldwide tax, except for long-term services provided offshore (eg, for at least 183 days or more in any 12-month period). According to the Budget Review, at issue is whether the worldwide tax regime of South African services should be extended (subject to appropriate credits), especially if a South African employer is involved.
Although no further details have been given at this stage, it appears as though the intention may be to limit the scope of the foreign earnings exemption currently available to South African residents, particularly where the services are rendered on behalf of a South African employer. Should this be the case, then a split employment arrangement between South African and offshore employers may be a suitable option for the rendering of foreign services. This type of arrangement is currently the recommended option in any event in order to avoid the risk that the employee could create a permanent establishment for the South African entity in the jurisdiction where he or she renders services.
In the event that such foreign earnings become taxable in South Africa, residents should be able to claim a tax credit for foreign taxes paid in respect of that remuneration against their South African tax liability.
Employers planning international assignments of employees should be aware that the tax treatment of foreign remuneration in these circumstances is likely to change in the near future.