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Foreign Employment Income Tax Exemption SARS guidance for South Africans working abroad

Over the last few weeks, we have been inundated by our expatriate clients on the impact of their foreign earnings. This insight article will provide impact of the changes regarding Foreign Employment Income Tax Exemption which took place from 1 March 2020.

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In this insight, we unpack the Foreign Employment Income Tax Exemption SARS guidance and aim to clarify that “the exemption under section 10(1)(o)(ii) was introduced in 2000 to prevent double taxation of an individual’s income between South Africa and a host country. The exemption creates opportunities for double non-taxation in instances where the host country imposes little or no tax on employment income. This outcome is contrary to the purpose for which the exemption was introduced. SARS originally indicated that the impact of the exemption would be monitored with specific focus on whether the exemption is unduly exploited resulting in no foreign tax on foreign employment income.”

From 1 March 2020 and in respect of years of assessment commencing on or after that date, foreign employment income earned by a tax resident of South Africa will no longer be fully exempt as the exemption under section 10(1)(o)(ii) will be limited to R1,25 million. Any foreign employment income earned over and above R1,25 million will be subject to normal tax in South Africa, applying the normal tax rates for the particular year of assessment. All requirements to qualify for the exemption under section 10(1)(o)(ii) remain the same.

Foreign Employment Income Tax Exemption SARS guidance: Temporary Relief

The Taxation Laws Amendment Act, 2020 relaxed the days requirement to qualify for the foreign employment income tax exemption. In terms of the current provisions, individuals who spent more than 183 days in aggregate and a continuous 60 days working outside South Africa would have qualified for exemption in respect of their remuneration. However, due to travel bans during the COVID 19 pandemic, these individuals could not travel in order to work outside South Africa, and therefore could not qualify for the above-mentioned 183-day requirement.

The 183-days in aggregate requirement is reduced to an aggregate of 117 days. An individual is still required to comply with more than 60 consecutive days requirement in the same period that the 117 days have been met.

The amendment does not provide permanent relief and only applies to any 12-month period for the years of assessment ending from 29 February 2020 to 28 February 2021. This temporary relief is therefore only applicable to the 2020 and 2021 years of assessment.

Foreign Employment Income Tax Exemption SARS guidance: Residency certificate vs Resident for tax purposes with SARS

According to Tax Exemption SARS rules, in order to qualify for the foreign employment income tax exemption, a taxpayer must be a tax resident of South Africa who earns certain types of remuneration for employment services rendered outside the Republic. The exemption will only be available provided the specified qualifying periods are met and none of the exclusions apply. We have found that there is a confusion between obtaining a residency certificate from your host country and being a resident for tax purposes with SARS. 

Having a residency certificate does not automatically exclude you from being a tax resident of SA. You will qualify as a tax resident in South Africa if you meet either criteria for the ordinarily resident test or the physical presence test. While the physical presence test is an evaluation of the number of days spent in South Africa, the ordinarily resident test is determined on a case-by-case basis.

Foreign Employment Income Tax Exemption SARS guidance: Days Test

In order to qualify for the exemption per Tax Exemption SARS guidelines, a person must be in employment, outside the Republic, for at least 183 full days during any 12-month period. A “full day” means 24 hours (from 0h00 to 24h00). The 183 full days do not have to be consecutive or continuous but, in order to meet the exemption requirements, a total of 183 full days in any 12-month period must be exceeded. It is not necessary to exceed this period by a full day. Any amount of time in excess of 183 full days, such as a few hours, will be sufficient.

In addition to the requirement that services must have been rendered outside the Republic for a period or periods exceeding 183 full days in aggregate during any period of 12 months, a person must also have rendered services outside the Republic for a continuous period exceeding 60 full days in the same period of 12 months. For example, if a period of 12 months from 1 April 2022 to 31 March 2023 is used to calculate whether the person spent a period or periods exceeding 183 full days in aggregate outside the Republic, that same period of 12 months must be used to determine whether the person spent a continuous period exceeding 60 full days outside the Republic.

Foreign Employment Income Tax Exemption SARS guidance: Limitation of the Exemption

From 1 March 2020, foreign employment income is no longer fully exempt under section 10(1)(o)(ii). The exemption is limited to R1,25 million in respect of each year of assessment during which the requirements of section 10(1)(o)(ii) are met. The qualifying criteria set out above for the exemption remain the same. Any foreign employment income earned over and above R1,25 million will be taxed in the Republic, applying the normal tax rates for that particular year of assessment.

A double tax situation may arise in respect of the portion of the remuneration earned over and above the R1,25 million. This will happen where there is no tax treaty or where a tax treaty does not provide a sole taxing right to one country; which means both countries will have a right to tax the income and the country of residence, in our case the Republic, will provide double tax relief. Section 6quat is the mechanism under South Africa’s domestic law to claim relief from double tax where the amount received for services rendered outside the Republic is subject to tax in the Republic and in the foreign country. This credit may be claimed on assessment when an individual submits an income tax return, provided certain requirements are met. This effectively means that the foreign tax paid on the portion of remuneration included in income will be set-off against the South African normal tax paid so that no double tax is ultimately suffered.

An employer may at his or her discretion, under paragraph 10 of the Fourth Schedule, apply for a directive from SARS to vary the basis on which employees’ tax is withheld monthly in the Republic. The potential foreign tax credit is taken into account to determine the employees’ tax that has to be withheld for payroll purposes. This is not the actual granting of the section 6quat credit. The employee is still required to submit an income tax return in which the actual foreign tax credit under section 6quat should be claimed.

If you're a South African tax resident earning an income overseas, speak to us about your tax obligations.

SARS has seen the potential of this as an additional source of revenue through this exemption and with the fiscus requiring the additional capital, the benefit previously received from working outside of the country has lapsed. Our team of tax experts can assist you to explain your current tax risk and support you with your tax return.

You may email us at info@kettleconsulting.co.za or call 011 025 1446 (Johannesburg) and 021 003 8000 (Cape Town)

Insight by:

Nkosi Madikizela

Tax Consultant

Kettle Consulting (PTY) Ltd

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