Global Courant
As tens of thousands of South Africans seize lucrative work opportunities abroad, many expats are unaware that their hard-earned income is at risk of double taxation, say tax experts Richan Schwellnus and Delano Abdoll of Tax Consulting SA.
The first tax would be levied by the South African Revenue Service (SARS) on worldwide income. The second could be a tax from the local tax authority of the country where this income is earned.
Tax Consulting SA said double taxation agreements (DTAs) exist between South Africa and certain jurisdictions that can prevent double taxation. However, many misconceptions still exist when dealing with this one.
The group said there is widespread misinformation about DTAs and as a result many expats and other foreign income earners are unaware of what is going on – they may think these DTAs apply automatically, or that they lose their income just be able to hide from SARS.
Tax Consulting SA gave some examples of these misconceptions and the reality of the situation.
Income earned abroad and tax residence
Many expats believe that SARS cannot tax their foreign income earned while living and working abroad. These expatriates claim that since their income is earned from a source outside South Africa, SARS has no right to tax their income earned abroad – this is false, Tax Consulting SA said.
Expats need to understand that the South African tax system is residence based.
Simply put, South African taxpayers will be taxed by SARS on their worldwide income.
South African tax non-residents will only be taxed on income derived from a source within South Africa’s borders, the group said.
By applying to the available DTA, expatriates can undertake the formal process of becoming a non-resident for tax purposes.
“The benefit of this is that their foreign income is instead made tax-exempt in South Africa,” said Tax Consulting SA.
A DTA enforces double taxation
Tax Consulting SA added that it is incorrect to believe that SARS would use a DTA with the host country to ensure that an individual is taxed twice.
The opposite is true, because a DTA aims to prevent an expat from being taxed twice.
DTAs apply automatically
Another common misconception among expats is that a DTA automatically applies to protect their foreign income from SARS tax. This is a serious error for several reasons.
Firstly, an expatriate can only claim double taxation exemption if a DTA is available between South Africa and their chosen foreign host country.
“For example, South Africa currently has DTAs with eighty-two countries around the world, including Australia, Belgium, Canada, Nigeria, Saudi Arabia and the United Kingdom,” says Tax Consulting SA.
Secondly, only expats who qualify for this can claim compensation within the meaning of the relevant DTA.
Determining eligibility is based on independent research by SARS into whether or not a person intends to stay abroad permanently.
Third, to change one’s tax status, applicants must go through a formal process; therefore changes do not happen automatically.
“In fact, only upon successful completion of the verification process will SARS issue an expatriate with a Non-Resident Tax Status Notice Letter confirming their tax non-resident status in South Africa.”
How does SARS know?
It is also incorrect to assume that SARS would not find out that an expat is making money abroad.
SARS actively collects information and shares it with foreign banks and tax authorities through the Common Reporting Standards (CRS) initiative. As a result, many expatriates have been monitored and penalized by SARS after their foreign income was discovered through the CRS.
According to Tax Consulting SA, these penalties can include fines, interest and even criminal prosecution. Therefore, expats must be transparent with SARS and accurately report their foreign income on their tax returns. As a result, they may be able to avoid double taxation by using the available DTA.
Tax residency certificate: guaranteed protection
Some advisors note that no double taxation will occur if an individual obtains a Certificate of Tax Residency (TRC) from a foreign host country; However, this is not the case.
“While a TRC is a critical document required by SARS as part of the formal DTA application process, it is only one piece of the puzzle. Expats will also be required to provide SARS with several key documents and a written motivation, preferably in the form of a legal opinion, to provide sufficient evidence of their eligibility for temporary non-resident tax status,” said Tax Consulting SA.
Collectively, all of these documents will paint a full picture of an expat’s factual background in support of their DTA application.
Read: Tax Season 2023 – What Businesses Need to Know
