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EXPATRIATE TAX COMPLIANCE FOR SOUTH AFRICANS ABROAD

STEP-BY-STEP

We have received numerous requests from South Africans working abroad for a step-by-step explanation on what should be done to ensure they are fully tax compliant and optimally planned, especially with the pending tax law change. Please note the below is specifically written for South African expatriates abroad.

Our steps are –

1. Get SARS diagnostic on compliance history and tax status.
2. Correct any outstanding returns, zero returns or incorrect tax filings.
3. Where you have left South African in the past 3 to 10 years with a permanent intention (intention of not coming back), you should seriously consider financial emigration through the Reserve Bank.
4. Where you have left South African longer than 10 years ago and / or especially where you have no bank account or tax number in South Africa, getting your non-residency status legally confirmed may be a better and cheaper option.
5. Where you have not left permanently, make sure you have disclosed world-wide income and capital gains, and also claimed the 183-and-60-day exemption correctly.
6. The new proposed policy change is well lobbied so, we recommend joining such a group to strengthen the cause as there is a good case to make for a less penal law change. An example hereof the “South African Expats Tax Petition Group” on Facebook.
7. Do not have knee-jerk reactions, i.e. wait for the law change at least in draft format, but from a position of compliance. This will in all probability only apply 01 March 2018 forward and there will be plenty of planning opportunities to pay less tax. We do not foresee anybody paying 45% tax with proper planning.

We note below some more in-depth information for those who are interested –

SARS Status Update (Tax Diagnostic)

We always recommend, as the very first step, for new clients to have a SARS status update done. Call this a tax diagnostic, so we move from tax speculation to your personal tax reality.

One cannot even consider whether there are any risks or your future planning options, where you do not know your tax position, according to SARS records. Where correctly done, this process creates no risk of a SARS audit or opening a can of worms.

Different tax practitioners approach this differently, but we have about 18 points we specifically want to verify. The more obvious ones are whether you have any returns or money outstanding, whether you have a local of foreign address, where the foreign employment income was disclosed, whether you have simply done zero tax returns. This gets more complex as SARS e-filing portal is a very powerful tool, which contains very specific information, or the lack thereof, is often the start to a SARS audit.

Based on our experience, most taxpayers believe everything is completely up to date, and only around 25% of the time everything is indeed all in order.

I Have Submitted Zero Returns

There is a very common misconception that where you are a South African abroad you could simply submit zero tax returns. Where you have simply left to work abroad, this is not only incorrect but also an offense under tax law.

The only case where you legally can submit zero tax returns are where (a) you are verifiable as a non-resident for South African tax purposes, and (b) you have no South African source income.

In all other cases you, need to make complete and correct returns to SARS, and for South African tax residents that means disclosing your world-wide income and capital gains.

If I Disclose My Income Correctly, Does This Mean I Will Need To Pay Tax On Offshore Income

We would like to assess your situation first, but the quick answer is “no”. Whilst you must disclose your employment income, such employment income is exempt where you have met the section 10(1)(o)(ii) exemption requirements. This means you disclose fully but do not need to pay taxes.

But I have a Tax Clearance?

Tax clearances are simply issued to say you have no returns or money outstanding. It does not verify compliance in any way or prohibit a SARS audit.

Have Been Audited, Therefore I Am Complaint

A SARS verification exercise is often confused with an audit. Simply submitting supporting documents does not count as an audit. Also, SARS normally only conducts limited audits, i.e. on a specific technical matter. However, where SARS has legally audited you on a specific item, they are legally prohibited from auditing you again, except where there is, for example, fraud or misrepresentation.

My Accountant Has Been Doing My Returns

There are excellent tax practitioners in the market and on many we simply, and always, have to truthfully acknowledge, that we cannot do better work. Unfortunately, there are many exceptions and even where you have paid for a big brand, there are no guarantees.

We had a case a couple of weeks ago where the taxpayer was adamant the accountant completed returns correctly and that the foreign employment income was correctly disclosed. He was pretty sure, having forked out just over R5,000 per year for the tax service. When we investigated, there was no claim in the tax assessment. We then further delved into the tax returns done and found that zero’s were declared! Thus, R5,000 per year for completing zero’s and filing the tax return incorrectly. This just emphasizes again, you cannot trust blindly and have to always ask the correct questions to not be misled.

How Will SARS Know

Everyone is reported under CRS or common reporting standards. Where you have a bank account, you are reported automatically and your South African passport or address means SARS is informed.

Employment is Critical (Currently)

The section 10(1)(o)(ii) exemption test only works for employment income and which is earned physically outside South Africa. It is therefore critical that you have an employment contract and not a self-employed or independent arrangement. If this has never been asked of you before, the chances are very good your tax return was done incorrectly in the past.

Importance of Passport copies

You can only evidence your absence from South Africa with passport copies. This must be certified. We recommend you make regular copies and scan them, in case your passport gets stolen. Getting for example airport emigration control records does not count. The only exception we have ever seen is for pilots and airline crew, as well as seafarers, where alternative logs are accepted. If this has never been asked of you before, the chances are very good your tax return was done incorrectly in the past.

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TIPS FOR EXPATRIATES – BRINGING MONEY TO SOUTH AFRICA

We receive many questions from South African expatriates abroad who regularly transfer money to South Africa, to support various costs or investments in South Africa. Some do this monthly and others effect larger transfers on a periodic basis. Whilst we are not a foreign exchange provider, one of our partners are well-known in financial planning circles, being a Certified Financial Planner® and he holds his own FSB License.

I have asked him for some of the most important aspects of transferring money internationally and some of the secrets of foreign exchange –

1. The most expensive way to transfer foreign exchange is through a normal banking system. This especially applies where you use the same corresponding banks. You may think they give you the best deal, but the quickest way to get thoroughly ripped-off is not knowing how you are being ripped-off.

Contact Donne@taxconsulting.co.za for details on who gives her clients currently the best forex service, including Reuters rate.

2. Where you transfer money between currencies, there is a “true” exchange rate. This is the rate quoted on Reuters. So, when you want to know how much Rands should really arrive, you must know what is the Reuters or Bloomberg rate. For example, where the ZAR is 10 to the USD (we wish, I know, but for ease of computation purposes), for every USD1 you refer, you will receive ZAR10 in South Africa.

3. The fact is that no bank gives you the “true” rate. They take a margin and this is called the “spread”. The bank never gives you the best rate. Their spread is often 3% to even 4.5%. Assuming a 4% spread, in our example, the USD1 then only gives you R9.60 in South Africa.

4. Where you use a forex exchange company, they give you a better spread. Say you get a 1.5% spread, the USD1 then gives you a R9.85. This is achieved as they do bulk buying and selling of currencies, so their rate negotiation is simply much better than what any individual can achieve.

We do not want to make too public where you can for free get the closest to true exchange rates for free, but send confidential request to Donne@taxconsulting.co.za to share the link.

5. The question is can these companies be trusted and why? We have seen clients using them for years and without fail the transactions are quicker and more secure. The reason is their arrangement is normally with the same bank, as only where you have different corresponding banks money sometimes get delayed over the ocean. As you will be dealing with a household name bank (different ones have different arrangements with different banks), we see this as no risk. Make also very sure you only deal with a registered FSB (registered with the South African Financial Services Board) meaning you have the normal full protection under South African law and full indemnity insurance.

6. As we are involved with expatriate financial planning, especially tax, we know the significant difference this makes at the end of the day. Getting the cheapest foreign exchange rates are very important for our clients and where you have a provider who offers a secure and better deal, please send through details, as we can always do a quick comparison, so others can also benefit from their service. The key to a good provider is having transparency!

7. Finally, you may have heard that bringing money into South Africa may have a tax consequence. This is not directly true. Being paid, remitting money into South Africa etc have no tax impact at all. Where does this rumor come from? Blame the Brits – they have a “remittance” basis of taxation for UK residents and domiciles, i.e. where you remit money into the United Kingdom, which you earned outside, this becomes taxable. There is no such South African tax rule and this has never been part of our law.

Please contact donne@taxconsulting.co.za for more information or should you need a review of your personal tax position by international tax experts.

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.