These South Africans are at risk of double tax, experts warn

 ·13 Jun 2023

As tens of thousands of South Africans seize lucrative employment opportunities abroad, many expats are unaware that their hard-earned income is at risk of being taxed twice, say tax experts Richan Schwellnus and Delano Abdoll from Tax Consulting SA.

The first tax would be done by the South African Revenue Service (SARS) on global earnings. The second could be a tax by the local tax authority of the country where this revenue is earned.

Tax Consulting SA said that double taxation agreements (DTAs) do exist between South Africa and certain jurisdictions that can prevent double taxation from happening. However, many misconceptions still exist when dealing with these.

The group said that there has been widespread misinformation regarding DTAs and, as a result, many expats and other foreign income earners are not aware of what’s going on – they may think these DTAs apply automatically, or that they can simply hide their earnings from SARS.

Tax Consulting SA provided some examples of these misconceptions, and the reality of the situation.

Income earned abroad and tax residency

Many expatriates believe that SARS cannot tax their foreign income earned whilst 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 incorrect, Tax Consulting SA said.

Expats must understand that South Africa’s tax system is residence-based.

Put simply, South African tax residents 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 the borders of South Africa, said the group.

By applying to the available DTA, expats may undertake the formal process to become tax non-residents.

“The benefit of doing so is that their foreign income will instead be rendered as non-taxable in South Africa,” Tax Consulting SA said.

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 a person is double taxed.

The opposite is true, as a DTA aims to prevent an expatriate from being taxed twice.

DTAs apply automatically

Another common misconception amongst expatriates is that a DTA will apply automatically to protect their foreign income from being taxed by SARS. This is a grave mistake for several reasons, said the tax firm.

Firstly, an expatriate can only claim relief from double taxation if a DTA is available between South Africa and their chosen foreign host country.

“For example, South Africa currently has DTAs in place with eighty-two countries around the world, including Australia, Belgium, Canada, Nigeria, Saudi Arabia and the United Kingdom,” Tax Consulting SA.

Secondly, only expats who qualify can claim relief in terms of the relevant DTA.

Determining if someone qualifies is based on independent investigations by SARS into whether a person has the intention to remain abroad permanently or not.

Thirdly, to alter one’s tax status, applicants must undergo a formal process; therefore, changes do not occur automatically.

“In fact, only upon successful completion of its verification process will SARS issue an expatriate with a Notice of Non-Resident Tax Status letter to confirm their tax non-residency in South Africa.”

How will SARS know?

It is also incorrect to assume that SARS would not find out that an expat is making money abroad.

SARS actively collects and shares information with foreign banks and revenue authorities through the Common Reporting Standards (CRS) initiative. As a result, many expatriates have been audited 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, expatriates should be transparent with SARS and accurately report their foreign income in their tax returns. By doing so, they can potentially avoid double taxation by using the available DTA.

Foreign tax residency certificate: guaranteed protection  

Some advisors note that double taxation will not occur if a person acquires a tax residency certificate (TRC) from a foreign host country; however, this is not the case.

“While a TRC is a crucial document required by SARS as part of the formal DTA application process, this is only one piece of the puzzle. Expatriates will also need to provide SARS with several key documents and a written motivation, preferably in the form of a legal opinion, to provide sufficient proof that they do qualify for a temporary tax non-resident status,” said Tax Consulting SA.

Collectively, all of these documents will paint a complete picture of an expatriate’s factual background in support of their DTA application.

Read: Tax season 2023 – what businesses should know

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