If a South African expatriate had to describe 2020 in one word, “uncertainty” would undoubtedly be considered one of the most appropriate, says Thomas Lobban, legal manager for cross-border taxes at Tax Consulting South Africa.
Even before the world was upset by 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 unrestricted access to quick and easy tax advice provided by ‘experts’ on social media. Worse still, these experts often have conflicting views on what to expect as this is a multi-dimensional and quite complex area of taxation, ”said Lobban.
“We have found particular discord with regard to the relief granted under a double taxation agreement (DTA), especially when taxpayers wish to avail themselves of the relief under the DTA’s Article of Residence. The aim of the following points is to clear up the most common misunderstandings that arise in these cases. “
1. Residence versus tax law
One fundamental clarification that needs to be made is how the DBA remedies this, Lobban said. A less common misconception is that in a DTA between the host country and South Africa, the income earned in the host country is not taxable in South Africa, as the host country has sole tax law. That’s wrong, he said.
“When it comes to income from employment, most DTAs give the country of residence sole tax law unless the employment is in a host country. In this case, both countries have the right (under certain exclusion conditions) to tax the income in question. The result is that your income as a South African resident taxpayer will continue to be taxable in South Africa.
“The fact that the host country has dual tax laws could bring some relief when it comes to applying for tax credits in South Africa, but that is not the form of relief that affects our current discussion,” said Lobban.
The far greater relief is that provided in the residency article of the DBA. If correctly applied, this article may override the provisions of the Income Tax Act. This means that under the DTA, a person can be considered a non-resident regardless of whether or not they pass the domestic tax audits.
Due to the DTA, the taxpayer will be treated as a non-resident for a certain period of time, said the tax expert.
2. The DTA discharge takes place automatically
Perhaps the most dangerous misconception is that the very existence of a DTA between South Africa and a taxpayer’s host country means that they automatically qualify for DTA relief. That’s wrong, said Lobban.
“The truth is that the facts of each taxpayer must be assessed individually to determine whether the underlying requirements of a particular provision of the DTA have been met. Assumptions are especially problematic when it comes to the residency article, as the underlying requirements are very factual.
“While DTAs are generally uniform, the residency article tends to have subtle differences between the DTAs entered into with different contracting states, making a blanket approach even more dangerous.”
3. No need to submit returns
Due to the discussion under the previous point, taxpayers often mistakenly believe that they are exempt from filing tax returns by relying on the DTA. That’s wrong too, said Lobban.
“DTA reliefs are an exception that must be” enforced “and unfortunately SARS does not allow taxpayers to make this decision unchecked and unchallenged. Just as if a taxpayer applies for the exemption under Section 10, Paragraph 1, Letter O, Clause Ii of the Income Tax Act, as a resident under South African law, you must submit your tax return and claim the corresponding relief. “
According to Lobban, this gives SARS an opportunity to verify that you meet the requirements of the exemption. “If you don’t submit a return, you are doing an essential secrecy. As a result, the limitation period for additional assessments does not apply, which means that SARS can reopen any historical tax period. “
One possible misunderstanding in and of itself is that if the DBA relates to your facts, you will qualify for relief until your circumstances change, the tax expert said. “In theory, this may be the case, but due to your notification requirement, the determination of the applicability of the DBA to your facts is practically done annually.”
4. Residence certificates guarantee relief
Certificates of residence generally state that a taxpayer is resident in the host country for tax purposes. Certain consultants believe that such a certificate means that they are no longer a resident of South Africa or that they are automatically deemed to be exclusively resident in the host country under the DTA. That’s wrong again, said Lobban.
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, it means the taxpayer has dual residence status, which means the taxpayer is eligible to apply the tie-breaker test under the DBA’s residence article, Lobban said.
“In other words, the residence permit serves as a ticket to the ball game, but that’s where it stops. It is entirely possible to have a residence certificate from your host country without qualifying for a DTA relief.
“Likewise, you shouldn’t associate a tax residency certificate with a residence permit – this is one of the biggest missteps that consultants make on night flights. If you claim DTA relief due to the strength of the latter, you might get a nasty surprise. “
5. You are still liable for the difference between the host country and the SA tax
A misunderstanding that has arisen in Middle Eastern countries is that if you apply the DTA relief you are still obliged to pay the tax differential in South Africa, Lobban emphasized. The misunderstanding seems to result from a merging of the DTA principles and the use of tax credits. This is wrong, he said again.
If the DTA relief is correctly claimed, the taxpayer in South Africa is generally no longer subject to tax on income earned in connection with services provided in the host country. This will not be affected by the taxes payable in the host country or the lack of them, he said.
In the past, the DTA relief was probably not used sufficiently by South African expats before the introduction of the “expat tax”. This is arguably why the market lacks understanding of how it is applied. Even so, the potential relief that comes from a DBA is profound – it is possible to completely exempt your foreign labor income.
“However, this must be combined with a word of caution – the DTA is not an elixir that guarantees absolution from South African taxation. Accountants who apply for DTA relief without understanding the underlying legal principles and practical requirements do so at the risk of their own clients, ”said Lobban.
Read: Another Growing Tax Threat in South Africa: SARS