By Thomas Lobban
If a South African expatriate had to describe 2020 in one word, “uncertainty” would undoubtedly be one of the most appropriate. Even before the world was in turmoil due to the Covid-19 pandemic, South African expatriates were confronted with the many unknowns that the era of the “expat tax” would herald.
The situation is exacerbated by the fact that taxpayers have unhindered access to quick and easy tax advice offered by “experts” on social media. Worse, these experts often have conflicting views on what to expect given that it is a multidimensional and quite complex area of control.
We have found particular disagreement with regard to the relief under a double taxation agreement (DTA), especially if taxpayers wish to avail themselves of the relief under the DTA’s article of residence. The following points are intended to clarify the most common misunderstandings in these cases.
1. Residence vs. Right of Taxation
Basically it has to be clarified how the DBA discharges. A less common misconception is that in a DTA between the host country and South Africa, the income generated in the host country is not taxable in South Africa, as the host country has sole taxation rights. This is wrong.
Most DTAs grant the country of residence the sole right to tax income from employment, unless the gainful activity is carried out in a host country. In this case (under certain exclusion conditions) both countries have a tax law on the income in question. As a result, your income as a tax resident in South Africa will remain taxable in South Africa.
The fact that the host country has a right to double taxation could make it easier to obtain tax credits in South Africa, but this is not the form of relief that is shaping our current discussion.
The far greater relief is that of the DBA’s article of residence. If properly applied, this article can override the provisions of the Income Tax Act so that a person can be considered a non-resident under the DTA, regardless of whether or not they pass the residency tests under domestic tax law. Due to the double taxation agreement, the taxpayer is treated as a foreigner for a certain period of time.
2. DTA exemption applies automatically
Perhaps the most dangerous misconception is that the very existence of a DTA between South Africa and a taxpayer’s host country automatically means they will automatically qualify for DTA relief. This is wrong.
The fact is that the facts of each taxpayer must be assessed individually to determine whether the underlying requirements of a particular provision of the DTA are met. Assumptions regarding the residence permit are particularly problematic, as the underlying requirements are very fact-driven. Even if DTAs are generally uniform, the article on residence tends to have subtle differences in the DTAs concluded with different contracting states, which makes a blanket approach even more dangerous.
3. No need to submit returns
From the discussion under the previous point, it emerges that taxpayers often mistakenly believe that they are exempt from filing tax returns by relying on the DTA. This is wrong.
The DTA relief is an exception to be “claimed” and unfortunately SARS does not allow taxpayers to make this decision unchecked and unchallenged. Just as if a taxpayer claims the exemption under Section 10 (1) (o) (ii) of the Income Tax Act, as a resident under South African law, you are required to file your tax return and claim the appropriate relief.
This gives SARS the opportunity to check whether you meet the requirements of the exemption. If you fail to submit a return, you are making a material non-disclosure. As a result, the limitation period for additional assessments does not apply, which means that SARS can reopen any historical tax period.
One potential misconception in itself is that if the DBA relates to your facts, you are entitled to relief until your circumstances change. Theoretically, this may be the case, but in practice the application of the DBA to your situation is determined annually due to your obligation to notify.
4. Residence certificates guarantee relief
Certificates of residence usually state that a taxpayer is considered to be resident in the host country for tax purposes. Some consultants are of the opinion that, as a result of such a certificate, they are no longer resident in South Africa or are automatically considered the exclusive residence of the host country within the meaning of the DTA. This is wrong.
The certificate of residence confirms that the taxpayer is considered to be a resident within the meaning of the domestic tax legislation of the host country. This does not override the fact that a taxpayer is a resident under the Income Tax Act. At best, this means that the taxpayer has dual residence status, which means that the taxpayer is then entitled to use the tie-breaker test under the DTA’s article of residence. In other words, the certificate of residence can serve as a ticket to the ball game, but it stops there. It is entirely possible to have a residence certificate from your host country without being entitled to DBA exemption.
Likewise, one shouldn’t confuse a tax residency certificate with a residence permit – this is one of the biggest missteps of night vision consultants. If you make a DTA relief claim based on the latter, you may be in for a nasty surprise.
5. You remain responsible for the difference between the host country tax and the SA tax
A misunderstanding that has probably surfaced in the countries of the Middle East is that you have to pay the difference in taxes even with DBA relief in South Africa. The misunderstanding seems to result from a merging of DTA principles and the use of tax credits. This is wrong.
In general, if the taxpayer makes proper use of the double taxation relief in South Africa, he is no longer subject to taxation of income from work that is generated in the context of services provided in the host country. This is not affected by the taxes payable in the host country or the absence thereof.
Historically, before the introduction of the “expat tax”, the DBA relief was probably not used enough by South African expats. This is arguably why the market lacks understanding of how it is applied. Nevertheless, the possible simplifications through a DTA are far-reaching – it is possible to fully exempt your foreign earned income. However, this must be combined with a precaution – the DTA is not an elixir that guarantees absolution from South African taxation. Tax practitioners who avail themselves of DBA relief without understanding the underlying legal framework and practical requirements do so at the risk of their own customers.
Thomas Lobban is Legal Manager Cross-Border Taxation at Tax Consulting South Africa.