The South African Revenue Service (SARS) recently issued Draft Interpretation Note 16 (Issue 2) for public comment. Compared to the present Interpretation Note 16, the draft interpretation note indicates a marked shift in SARS's interpretation of the tax exemption for foreign employment income under Section 10(1)(o)(ii) of the Income Tax Act (58/1962).


The exemption in Section 10(1)(o)(ii) has been used quite successfully over the years by individuals rendering services in a foreign jurisdiction and earning income for those foreign services. Its effect is to render a portion of the remuneration earned from those foreign services exempt from normal tax in South Africa. Certain practices have developed over the years in applying the exemption, read with SARS's views as set out in Interpretation Note 16.

Generally, income earned by a resident from the rendering of services anywhere in the world will be included in 'gross income', as defined in Section 1 of the Income Tax Act. Notwithstanding the general residence-based rule, certain exemptions apply – specifically, Section 10(1)(o)(ii) provides for remuneration which would ordinarily have been subject to normal tax. The exemption applies to services rendered outside South Africa for or on behalf of any employer, provided that the individual is outside South Africa for a period or periods exceeding 183 full days (calendar days, not working days) in aggregate, during any 12-month period commencing or ending during a tax year.

Further, the exemption applies only if the 183-day period includes a continuous period of absence of at least 60 days. Both the draft interpretation note and Interpretation Note 16 confirm that any 12-month period could be used for the purposes of this provision (ie, a backward and forward-looking approach). Further, the services referred to in Section 10(1)(o)(ii) should be those that led to the generation of the income that is considered for exemption.

Both the draft interpretation note and Interpretation Note 16 confirm that where Section 10(1)(o)(ii) applies to a given employee's scenario, an employer can elect not to deduct employees' tax – if it is brave enough. Given the inherent employees' tax late payment penalty and understatement penalty and the interest risks associated with not complying with Section 10(1)(o)(ii), most employers continue to deduct employees' tax, thereby handing responsibility over to the employee to claim a refund on assessment. The relative size of those refund claims would, in most cases, trigger a SARS review in the hands of the affected employee.

Draft Interpretation Note 16 (Issue 2)

Regarding the calculation of the 183 and 60-day periods, as required under Section 10(1)(o)(ii), the draft interpretation note essentially continues SARS's previous practice whereby weekends, public holidays, annual leave days, sick leave days and rest periods spent outside South Africa are taken into account in determining any potential exemption.

Interpretation Note 16 contains examples indicating the practical application of the '183/60-day approach'; based on this, the determination of an amount qualifying for exemption might seem relatively straightforward. However, that straightforward approach is set for a rethink under the draft interpretation note and employers should carefully evaluate the impact that it will have on its employees that render services offshore.

The draft interpretation note states that a "common misconception is that all remuneration received or accrued during the qualifying 12 month period of 12 months is exempt". It further states that only "the remuneration received or accrued in respect of services rendered outside the Republic during the qualifying period of 12 months is exempt". SARS is arguably correct in its approach; however, the practical application of the above statement may be based on an approach not considered by many employers (at least, not in practice). Essentially, the draft interpretation note introduces an apportionment calculation, which seems to act as a second step in determining the actual remuneration exempt from normal tax, once the 183 and 60-day tests have been complied with.

Stated differently, in any given situation, the first test would be to apply the normal 183 and 60 day rules – which take into account weekends, public holidays, annual leave days, sick leave days and rest periods – and the second test would be to apply SARS's apportionment methodology, which excludes any day not regarded as a work day. A 'work day', as contemplated in the draft interpretation note, does not include "weekends, public holidays or leave days. Only days of actual services rendered are taken into account". Thus remuneration received for work days in South Africa would be subject to normal tax, whereas jetting in and out of South Africa could have slipped into the exemption potentially under Interpretation Note 16 (where no apportionment is contemplated).

In determining the tax-exempt portion under Section 10(1)(o)(ii), draft interpretation note contemplates the following apportionment formula:

exempt portion = (work days outside South Africa for the period/total work days for the period) x remuneration received during the period

The draft interpretation note provides various examples of the practical application of the apportionment approach.

It also deals with a common scenario where employees take mandatory rest periods that are enforced by their home or host country's health and safety regulations:

"[No] actual services are rendered during the rest periods, even though the employees remain in continuous employment during these periods. The services that are rendered to earn the remuneration are the services that are rendered during the work shifts."

The draft interpretation note concludes by stating that if "those services are rendered offshore and during a qualifying period, all remuneration attributable to those offshore services will qualify for exemption and no apportionment must be done". This approach is uncertain, as it may be that the 183 and 60-day rules are complied with, but it is unclear whether compulsory health and safety rest periods (which are not annual leave) are then regarded as work days outside South Africa. What if those compulsory rest periods are spent in South Africa? Does it affect the work day driver in the apportionment approach? A practical example is probably required in the final version of the draft interpretation note.

Although not covered in this update, the interpretation note also expands on the approach to take regarding share incentive scheme gains made under Section 8C of the Income Tax Act. The apportionment approach contemplated for purposes of Section 8C follows similar approaches already dealt with under previous binding private rulings.


Employers and individuals rendering services offshore should take account of SARS's contemplated approach and ensure compliance with Section 10(1)(o)(ii). SARS is planning on tightening the requirements for accessing the foreign employment tax exemption without necessarily changing the wording of the act itself.

For further information on this topic please contact Ruaan van Eeden at Cliffe Dekker Hofmeyr Inc by telephone (+27 11 562 1000) or email ( The Cliffe Dekker Hofmeyr website can be accessed at

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