Archive for category: News & Articles

UPDATE ON SOUTH AFRICAN TAX ON EXPATRIATE EMPLOYEES AND VARIOUS CLIENT QUESTIONS / RESPONSES TO SOME SOCIAL MEDIA COMMENTARY

The National Treasury announcement of taxes on expatriate employees, where no exemption under section 10(1)(o)(ii) will be allowed where there are not actual taxes paid in the host country, has resulted in considerable comment and debate. We wish to publish this second notice to assist those South African taxpayers who wish to be fully compliant, yet optimally structured, to guide them through the myriad of issues to be considered.

I was once “asked” by a wealthy United States businessman what he is missing with the South African taxpayer public. In the United States, he mentioned, no one will ever talk socially about not paying their taxes or doing anything remotely wrong. You never know who is listening. He was bemused that in South Africa there is open talk and bragging about not paying one’s taxes; as if SARS criminal auditors cannot access Facebook groups and cannot see posts, years from now. In the United States they at least have a strong tax paying culture, so if you do not pay your share, society turns on you. Arguably we are far from this in South Africa, but if you have been naughty and feel the desperate need to tell the world, perhaps one should consider that if someone does not like you, they can always do a SARS tip-off through a simple website form.

Therefore, please approach with caution the comments by various self-proclaimed tax journeymen, and whilst there are many half-truths doing the rounds, some views are simply dangerous and others so clueless that one only hopes that no-one will stake their livelihood on these views. One may guess anyone who has cheated the taxman somewhere can put themselves out as a charlatan, but that hardly makes their opinion worth following.

Some quick thoughts on posts –

SARS cannot find me, so I am ok

Well actually nothing can be further from the truth. Google FATCA and CRS, as well as see the activated agreements at http://www.oecd.org/tax/automatic-exchange/international-framework-for-the-crs/exchange-relationships/#d.en.345426. Select South Africa in the receiving drop down menu to see who is sending the data to South Africa. This is off course only the start, as Mauritius and other international locations are all joining.

Offshore tax evasion has become a growing concern worldwide, and governments and financial institutions have become much more aware of the large amounts of undisclosed wealth held in offshore accounts. In an effort to combat tax evasion the global version of the United States’ Foreign Account Tax Compliance Act (FATCA), known as the Common Reporting Standard (CRS), came into effect in South Africa on 1 March 2016. CRS is the global standard for the automatic exchange of financial account information and extends to all accounts held by entities and individuals with foreign tax obligations and entities with controlling persons who have foreign tax obligations.

Therefore, they do not care so much where you are, but more where your bank account is located. Your South African passport triggers the global reporting, which ends up with SARS. Granted, the wheels of the law turn slowly. But you may have already been reported, thus you need to make sure your ducks are in a row. Actually, this is exactly the reason for the SARS Special Voluntary Disclosure Programme which is currently active and running.

SARS have accepted my non-disclosure, so I am in the clear

Where you have not made full and correct disclosure on your personal tax return, there is no prescription. This means SARS can open this years from now and assess you correctly, with penalties and interest.

The automatically generated SARS assessment does not mean you have passed verification; and even where you have been verified, you have not been audited. Where you have been audited, you would know you have been audited, as this is a painfully intrusive process.

SARS will need to prove my status and that I am at fault

Unlike criminal law, in tax law you are guilty until you can prove yourself innocent. This is called the “onus of proof” requirement  – see section 102 of the Tax Administration Act 28 of 2011. Most tax court cases are lost in South Africa as the taxpayer cannot discharge the onus of proof.

This is why, as tax professionals, we have difficulty in explaining tax planning requirements and documentary processes to clients. The question often asked is where does it say I “must” do this. The answer is, nowhere. Where you cannot defend your tax position adopted on a balance of probabilities, the tax case will go against you.

SARS lacks capacity and competence

This may be true, so you may be correct, for now. However, just because you committed theft 20 years ago, does not mean you are pardoned. Some of our most complex tax cases we have had to defend, dates to events 10 to 15 years ago, often sins of the forefathers, which caught up with the next generation. SARS may be a bit weak now, but they will rise again and head-hunt the skills and expertise to audit backwards. It is on these cases where 200% penalties come into play and if you have not seen the TAA compulsory penalty chart, please let us know and we will do a post.

The tax law change will only come into play in two years

Would you like to bet something, to have skin in the game? SARS needs to urgently collect more taxes. Do you know of any tax law amendments announced in the National Budget process, which was not implemented in the same year, some retrospective, some from date of promulgation and, at best, 01 March [2018] onwards?

There is nothing one can do now, before the law is not implemented

This is a view, but probably not a good view. If you want to claim non-residency status and have not done this correctly, it is a no-brainer that sooner is better. If you have been submitting no returns, it would be a good idea to catch-up now, simply being a compliant taxpayer makes sense at various levels. Where you have done incorrect (zero) tax submissions, you are high risk and should regularize.

There is of course plenty more which can be said, but I will allow comments to run for a while, before responding again. Need to do some real work as well. My next post will be on the actual recommended steps which should be considered to be optimally planned.

Further to the Budget Announcement on proposed amendment to section 10(1)(o)(ii), the exemption section referred to often as the so-called 183-and-60-day rule; we have seen extensive commentary on social media on the impact of this section.

Those who have followed the comments will resonate with the various layman views expressed. The comments have ranged from that this is fake news and some have listened to the whole budget speech and found no reference thereto (needless to say this is a misunderstanding of the budget process and incorrectly assumes that the Parliamentary speech notes the technical tax law changes – tax professionals normally skip the speech, but deeply study the tax technical papers published by National Treasury); to comments that there is nothing to worry about (which may apply to some, but no-one should do international tax planning applying the ostrich principle); to perhaps the more close-to-correct views expressed that you need to carefully consider your tax residency status, to determine the impact of the change.

We have been inundated with questions on the announced expatriate tax law change and whilst the draft legislation has not been published for comment yet, there are some points which may be made with technical certainty; for a better informed South African expatriate view on tax planning and compliance.

1. The tax law change will become effective either 01 March 2017 or 01 March 2018. We disagree with the view that the law-change will necessarily be effective 01 March 2018 onwards only. There is a rally for more tax collection and this is sometimes applied arguably unfair, even retrospective. A good example in the Budget 2017/18 announcement is the dividend tax-increase from 15% to 20%, which became effective the 22^nd of February 2017, the day of the Budget Speech. Should the draft legislation indicate the effective date as 01 March 2017, effectively retrospective, we will make submission to National Treasury as well as the Parliamentary Portfolio Committee hereon. However, it should be noted that the effective date may very well be promulgated sooner, so in the interest of conservatism, the prudent time to review one’s tax affairs is immediately.

2. This law change only impacts employees who are tax resident in South Africa. This is the aspect which created the most confusion by various layman commentators; and whilst we appreciate that everyone is entitled to a view (every tax court case in South Africa, results from the taxpayer and SARS having different views, the problem is that SARS has a recent win ratio of just over 68%), one does wonder why some of these social commentators feel the need to express themselves on something they have no technical understanding of.

3. To debunk these mistruths and give you a head-start to up-skilling yourself you may consider familiarising yourself with the below information –

(a) Tax residency is a term defined in the Income Tax Act, No 58 of 1962 (“the Act”) and which has effectively three components. The most important component, for purposes of this note, is determination of when a person is “ordinarily resident” in South Africa. This term has been developed in case law for over half a century and the technical correct document hereon is SARS Interpretation Note 3, which explains SARS’ view This can be accessed from the SARS website or you are welcome to email contact@taxconsulting.co.za and we will send on a copy. This interpretation note is a useful start, but we recommend a reading of both the leading South African cases of Cohen v CIR (13 SATC 362) and CIR v Kuttel (54 SATC 298).

(b) Becoming non-resident for South African tax purposes, therefore, is a subjective test, as supported by objective factors. It should be noted that this has absolutely nothing to do with having a work permit or residency permit somewhere else, how long you have been outside South Africa or whether you disagree with taxpayer money applied to Nkandla. Also, non-residency for tax is not something you automatically assume, because you have decided to not pay South African tax. It would be nice to sit on your porch and unanimously decide that your days of paying South African tax are all over; and that is the end of your tax filings and contribution to the South African fiscus, but that is unfortunately not how global tax compliance works. The rub comes when SARS audits you and / or you are reported under FACTA. This is where confidence quickly evaporates with the non-compliant taxpayer. Some aspects to consider –

i. The date when you became non-resident will be verified by SARS as when you should have disclosed a “deemed disposal” for capital gains’ tax purposes. As a resident, you would have paid   tax on world-wide income including on world-wide capital gains. When you became non-resident, SARS’ taxing right ends on most assets (there are some exclusions), therefore, SARS collects CGT on the capital gains on your assets up to the point of becoming non-resident. Where you have failed to do this correctly, you can correct with a SARS VDP, but this again is a complex area in which you would need professional assistance.

ii. Where your intention was genuinely to become non-resident, you should have completed financial emigration through the Reserve Bank. This is a legal requirement where you claim to be not ordinarily resident for exchange control purposes, albeit part of Exchange Control Regulations and not the Income Tax Act. There is no argument with SARS where you claim to be not ordinarily resident for tax, but have not formally emigrated. This does not impact your ability to use your South African passport, but does change your banking arrangement on how you move money and other fiscal rules. Luckily, you can retrospectively emigrate through the Reserve Bank and whilst we do not deal therewith, as the admin and bureaucracy does not excite us, there are two competent specialist providers to whom we regularly refer those needing assistance.

iii. Where you annually return to South Africa after your wanderings, as evidenced by your passport, you would not have much traction claiming to be South African resident. You can get a formal tax opinion from a tax advisor confirming that you are non-resident in South Africa, however, SARS no longer issues Binding Private Rulings hereon. We can share a sample sanitised Ruling (taxpayer details deleted; should you not be able to find this on the SARS website, feel free to ask contact@taxconsulting.co.za).

iv. The biggest mistake a South African expatriate can make is where they claim to be non-resident for South African tax, but is later found after they retire to South Africa, to have been tax resident all along. Then you have risked your whole retirement planning on incorrect reasoning, so please be extremely careful when you foresee that you may return to South Africa. Then it is better to remain tax resident and implement good tax planning principles.

(c) Tax treaties have very limited application, as you need to evidence that you are tax resident in a double tax treaty (“DTA”) country. Where you claim DTA relief, the deemed disposal capital gains tax rule still applies to you. Tax treaties will also never exempt you from the taxing right in your country of residency. They only determine which country may tax you first and which country must give credit for taxes paid, as far as employment income for tax residents are concerned. Please read article 14 or 15 (dependent personal services) in the applicable DTA, before making a general statement on the use of DTA’s. They are all the same as framed on the OECD Model Tax Convention and the OECD Model and Commentary thereon, is compulsory reading for anyone before claiming a tax treaty exempts you from South African taxes. Again, contact contact@taxconsutlting.co.za should you be unable to find reference.

4. Where you are South African tax resident, you should have disclosed your world-wide taxes in an annual SARS tax submission. Just submitting a zero tax return or leaving out the offshore employment income is incorrect. You may get away with this for a period, but some of our most complex audits and settlements on the steps of the Tax Court have happened where SARS audits this long after the expatriate has returned, claiming the return was never done correctly and the exemption never properly claimed. When SARS verifies this tax exemption claim [you must disclose your foreign employment income and the claim the corresponding tax deduction where indicated in your tax return] the request is for copies of passport (to show you meet the days’ requirement) and copy employment contract (to show you meet the employment requirement).

5. In future, on the anticipated law change, you will also need to evidence that the income was taxed in another country. This would obviously mean income tax on the employment income and not VAT, dividends tax or corporate tax (apologies to the reader, but some social media commentators, remarkably suggested because they will start paying VAT in Dubai, the income tax change will have no impact on them).

6. There will remain planning to significantly reduce taxes on offshore employment income through legitimate structuring. We will deal herewith as the draft legislation is published and obviously, this is more for our clients. The principle will be that tax residency must first be considered; and where broken, this must be done in a manner that the taxpayer can discharge the onus of proof (including CGT deemed disposal and financial emigration).

7. Where the taxpayer remains tax resident, South African expatriates abroad must accept that the days of earning completely tax-free are over. Some tax will have to be paid, and this can be achieved with proper and pro-active planning, depending on the expatriate circumstances and level of employment income. The important measure here for your tax provider is someone who can not only do tax planning, but also guarantee proper follow-through to ensure that the purported planning is accepted by SARS on assessment and survives detailed audit.

We sincerely hope this article assists in better informed social media commentary and ultimately for South African expatriates to be better planned whilst remaining fully tax compliant. Our vested interest in providing this information is that perhaps some high net worth and / or up and coming wealth creating South African expatriates, will consider becoming our clients.

BUDGET 2017: TAX CHANGES

The 2017 budget lived up to the expectation created by the Finance Minister with the medium term budget policy statement late last year in which it was made clear that R28bn in additional tax revenue must be generated.

Tax increases were announced as follows:

• Introduction of top marginal tax rate of 45% on personal taxable income above R1 500 000;

• Increase in tax rate applicable to trusts (excluding special trusts) from 41% to 45%;

• In consequence of increased top marginal rate for individuals, effective CGT rate for natural persons increased from 16.4% to 18% and in the case of trusts other than special trusts from 32.8% to 36%. The effective CGT rate applicable to companies remains the same at 22.4%;

• Increase in dividends tax rate from 15% to 20%. Effective corporate tax rate is 42.4% from 1 March 2017. Foreign dividends that don’t qualify for exemption will also now have an effective tax rate of 20%; and

• Withholding tax on non-residents disposing of immovable property is increased from 5% to 7.5% for foreign individuals, from 7.5% to 10% for foreign companies and from 10% to 15% for foreign trusts.

SARS’ tax pocket guide, which you can access here, contains a summary of the latest rates for the upcoming fiscal year.

Other tax changes proposed in the budget include:

• Expanding the VAT base to include VAT on fuel. This is in addition to the fuel levy;

• The section 10(1)(o)(ii) 183/60 day exemption for employment income to be amended to allow the exemption only where the employment income is taxed in the foreign country;

• The definition of ‘resident’ to be amended for VAT purposes to address issues with VAT becoming a cost to certain non-resident companies effectively managed and controlled in South Africa;

• The VAT zero rating associated with international travel is expected to be changed;

• Currently VAT is imposed in South Africa upon the supply of certain electronic services and that cloud computing and services provided for by online applications also be subject to VAT;

• Services supplied relating to securities or shares in a foreign incorporated company listed on the JSE should be subject to zero-rated VAT and accordingly changes to the VAT Act should occur to clarify the tax treatment of these services;

• The section 7C amendment to prevent the use of low or non-interest bearing loans to trusts for the transfer of wealth is to include such loans as given to companies owed by a trust. Furthermore the provision will be extended to exclude trusts not used for estate planning and employee share trusts;

• Income Tax Act to allow individuals to elect to retire, and the date on which the lump sum benefit accrued to the individual depended on the date on which the individual elected to retire and not on the normal retirement age. Currently, once the individual elects to retire, the Income Tax Act does not cater for the transfer of lump sum benefits from one retirement fund to another. It is proposed that transfers of retirement interests be allowed from a retirement fund to a retirement annuity fund, subject to fund rules;

• The eligibility threshold for employer provided bursaries and scholarships is to increase from R400 000 per annum to R600 000. The monetary limits are proposed to increase from R15 000 to R20 000 for NQF7 and below and from R40 000 to R60 000 for NQF 7 and above;

• Paragraph 12A of the Eighth Schedule (applicable on reduction of debt) does not currently apply to mining companies. This disparity will be addressed;

• The relief provided in paragraph 12A for dormant group companies or companies under business rescue should be extended to section 19;

• The practice of settling debt by a means other than cash, such as the conversion of debt into equity, is to be allowed. Provision will be made to recoup capitalised interest where an interest deduction was previously claimed;

• Specific countermeasures will be introduced to address share sales disguised as share buy backs;

• Short term shareholding structures aimed at circumventing debt reduction provisions are to be addressed;

• With a REIT’s assets not qualifying as allowance assets in a reorganisation transaction, the legislation will be amended to provide for reorganisation transactions involving REITs;

• Currently the qualifying purpose exemptions for third-party backed shares are too narrow. Provisions are to be further refined to cover all qualifying purposes;

• Refinements to the venture capital company regime, more specifically to investment returns and the qualifying company test;

• Large multinational companies will be required to submit country by country transfer pricing policies to SARS from 31 November 2017;

• Amendments to the Tax Administration Act to curtail inconsistencies arising out of the transitional rules for the calculation of interest on tax debts;

• Only the portion of travel expenses reimbursed by the employer exceeding the fixed distance or rate as determined, is to be regarded as remuneration for the purposes of determining employee’s tax;

• The annual cap of R350 000 on contributions to pension, provident and retirement annuity funds be spread over the tax year for determining monthly employee’s tax;

• Clarification will be made that the chairperson of the Tax Board has the final decision as to whether or not an accountant or commercial member must form part of the constitution of the Tax Board; and

• All decisions by SARS not subject to objection and appeal are to be subject to the remedies under section 9 of the Tax Administration Act.

These and other proposed tax amendments will be discussed in more detail by Jerry Botha at the SAIT Budget and Tax Update and the SARA Annual Tax Update respectively. For more details, see the links below.

http://www.sara.co.za/Events/EventsCalendar.aspx

http://www.thesait.org.za/events/event_list.asp

Historically, it was unclear whether amounts paid to a non-executive director were subject to the deduction of employees’ tax and whether the prohibition against certain deductions by salaried employees applied to them. This being as a result of a non-executive directors arguably not earning remuneration as defined in the 4^th Schedule to the Income Tax Act. No. 58 of 1962 (“the Act”)

This uncertainty further extended into the application of proviso (iii) to the definition of an “enterprise” as contained in Section 1(1) of the VAT Act, 89 of 1991 (“the VAT Act”), as this proviso excludes from the ambit of VAT the activities of an employee but nevertheless applies to the activities of an independent contractor.

During the 2016 budget speech, it was announced that an investigation into these uncertainties will be launched and clarity provided.  This resulted in the issuance by SARS of two welcomed binding rulings. These are, Binding General Ruling 40 (“BGR40”) which deals with employees’ tax implications for a non-executive director and Binding General Ruling 41 (“BGR41”), which deals with the VAT implications.

In terms of BGR40, SARS ruled that non-executive directors do not earn remuneration and therefore amounts paid to them are not subject to employees’ tax. In addition, BGR40 puts it beyond doubt that the prohibition against deductions as contained in section 23(m) of the Act does not apply to non-executive directors.

In terms of BGR41, SARS ruled that non-executive directors may be required to register for and charge VAT in respect of fees earned provided all requirements are satisfied.

While the rulings only apply from 1 June 2017, it is arguable that the rulings merely give effect to what has always been the position under South African tax law.