THE RISING GLOBAL TIDE OF WEALTH TAXES
Author: Jerry Botha
A new regime for South Africans working abroad created a furore. Our article looks at the background and the current situation from the viewpoint of an opportunity for tax practitioners to apply their expertise
There can now be little doubt that National Treasury and SARS were correct when they explained in Parliament that most South African expatriates abroad were non-compliant on their personal taxes. This came to light when National Treasury and SARS were probed on why they decided to change the dispensation that exempted foreign employment income, which worked perfectly well since the introduction of a residency basis of taxation. They were ready with their answer. According to SARS? records, less than 4 800 South Africans have submitted tax returns claiming the section 10(1)(o)(ii) exemption. When they added the number of South Africans who have done South African Reserve Bank financial emigration, the numbers simply indicated widespread non-disclosure and non-compliance.
Business case for tax practices making expatriates a focus area
There are two main reasons why the modern tax practice should focus on expatriate taxes and international individuals. Those who love the tax profession know that ensuring your clients are compliant yet tax efficient often means fighting a battle on two fronts ? keeping your clients on the straight and narrow, but also having to deal with SARS, taken their own collection pressures and inherited inefficiencies. But how does this support a sustainable business model for the modern tax practice?
Earn more client fees
Normal tax work remains the bread and butter in your practice, but more specialised tax services is the area where the client ultimately gets true value. Out of interest, as a specialised tax practice, we never use the SARS internal complaints system or Tax Ombud, and seldom refer matters to alternative dispute resolution. We know there are more efficient ways to get to a legally correct tax outcome. The better paying tax work includes tax dispute processes, tax debt compromises, SARS debt collection, all forms of SARS litigation and voluntary disclosure programme applications. Expatriate employees and international individuals fall within this category and we would recommend any tax practitioner who is seeing hard times, or who needs to optimise their practice, consider also making this a focus area.
Expatriate risk and SARS prosecution
We can see from SARS audit questions crafted for expatriate employees that they have shifted gear and are now starting to ask more in-depth and penetrating questions. Coupled with the carefully executed National Treasury and SARS amendment to the legislation enabling criminal prosecution, it is only a matter of time before SARS will show its first successes against a delinquent expatriate and/or their tax practitioner.
Tax practitioners working together
These items have forced expatriates, but also their tax practitioners, to reconsider their position as well as the technical and practical nuances of the expatriate tax. As National Treasury and SARS have predicted, the simple conclusion often drawn is that there has been past non-compliance. Our tax practice has had the privilege to work with so many tax practitioners and accountants, assisting them to address any past mistakes and ensuring a well-planned approach for the future. This has been a remarkable journey, where we now often find ourselves as the advisor to tax practitioners and accountants, both looking after the best interest of the expatriate client.
What are the signs of past non-compliance?
We respectfully submit, having worked on many expatriate cases, that the number one case of non-compliance remains tax returns which are simply not submitted or where simply a ?zero? tax return was incorrectly submitted. It takes a simple walk through of the history of the taxpayer to show that the tax returns submitted in the past do not align with the facts of the expatriate. It serves to note some of the most telling signs in this regard.
First year of being an expatriate
This is always an interesting year, especially where the expatriate did not leave exactly at the end of February, which results in a so-called ?split year? treatment. What makes expatriate taxes so interesting is that there is no one-size-fits-all, but normally there is an IRP5 certificate for part of the year, which reflects some form of retirement funding preservation or encashment and the resultant tax claims for logbook, medical aid, etc. But what about the remainder of the income, where the expatriate has left South Africa to work abroad? Was the section 10(1)(o)(ii) exemption claimed or did the expatriate become a non-resident for tax purposes? In cases of non-residency, was a financial emigration process followed or belatedly done (which we believe is still correct in law), or is there a tax residency certificate on file for the foreign tax jurisdiction? Did the family remain in South Africa and, if not, is there a rental income disclosed from the previous residential property? In cases of non-residency, there may be a capital gains tax disposal, even where you look back 15 years or more, as prescription does not protect the expatriate against, e.g. material non-disclosure.
Year Two onwards
We always find it remarkable how the following years of tax compliance do not align with prior year tax submissions. This appears to have become a lost skill, i.e. to ensure a simple and consistent tax filing strategy. There may be merit in a view that this point would equally apply to how some SARS audits are being conducted on expatriates but, with technology, no information is lost and inconsistency is a permanent risk.
Expats taxed on foreign income for the first time
A quick recap
When the initial announcement was made on the expatriate tax, it was indicated that expatriates would only be taxed where they paid no income taxes somewhere else. This appears to have been the original mischief, but the amendment has undergone some evolution. When the expatriate exemption was proposed to be completely deleted, the proposed amendment was widely perceived by the expatriate community as unjust. This prompted Barry Pretorius to form the Expat Petition Group and to oppose the amendment alongside Tax Consulting South Africa. The battle, spearheaded by Mr Pretorius, was taken to the steps of Parliament, where government ended up making an important concession: instead of a complete deletion, the exemption would be capped at R1 million and the effective date was postponed until 1 March 2020. But we were in for one more surprise: on the eve of the effective date, in the 2020 Budget Review, the Minister of Finance announced the cap on the exemption would be raised to R1.25 million, which took effect on 1 March 2020.
The results after Year One
We are now approaching the end of the first year of assessment where expatriates were taxed on their foreign employment income and it would be very interesting to know how much additional revenue SARS actually collected on account of the amendment.
From our perspective, the amendment caused a massive headache for employers, who approached us with complicated payroll questions and who had to make tough policy decisions with regard to their expatriate base. Beyond that, many of those who would have been affected by the amendment employed measures to fall beyond its application or to mitigate its impact with proper tax planning.
In practice we have seen many expatriates opt to cease their South African tax residency in one way or another to avoid the impact of the amendment completely, leading to an ever shrinking tax base ? stakeholders warned National Treasury of this outcome from the outset.
We will likely have to wait another couple of years before we can properly assess the outcome of government?s decision to push ahead with the amendment, despite being cautioned against doing so. In any event, in light of the COVID-19 pandemic, it will be very difficult to assess the ?success? of this amendment based on the 2021 year of assessment.
COVID-19 relief for expatriates
With the restrictions imposed on international travel under COVID-19, many South African expatriates were precluded from leaving South Africa. This meant they spent more time in the country than initially anticipated, leaving many concerned that they would no longer qualify for the exemption.
Over the course of lockdown in South Africa, government continuously announced expansion to our tax legislation to provide relief in respect of the pandemic. But none of the drafts of the Disaster Management Tax Relief Bills came to the aid of expatriates who were stuck in South Africa.
Unexpected government help
Much to the public?s surprise, even though not initially included in the draft tax Bills published on 31 July 2020, the response document issued by National Treasury and SARS revealed that government heard the plight of expatriates.
The response document proposed that the 66 days that commenced on 27 March 2020 and which ended on 31 May 2020, when the country operated under COVID-19 Alert Levels 5 and 4, should be subtracted from the 183-day threshold. In other words, if a taxpayer spent more than 117 days outside South Africa, they may still qualify for the exemption. The concession only extended to the aggregate number of days, and the continuous period of more than 60 days remained unchanged.
The relief was included in the final draft of the Taxation Laws Amendment Bill, tabled with the Medium-Term Budget Policy Statement on 28 October 2020. It is unclear what made the powers that be grant the relief. Perhaps they were swayed by the fact that other governments have made concessions where lockdown restrictions resulted in distorted tax implications for their taxpayers. Or, perhaps, this served as the extension of an olive branch to expatriates, whose plight has largely fallen on deaf ears.
In any event, this is good news for South African expatriates, many of whom could greatly benefit from the concession.
Phasing out the SARB process and a lock-up of retirement funds
Currently, taxpayers may withdraw their retirement funds prior to their retirement age upon emigration, where such emigration is recognised by the South African Reserve Bank.
As noted previously, the government made some big announcements on the eve of the effective date of the expat tax. The government announced in Budget 2020/21 that the SARB process will be phased out and individuals who seek to withdraw their retirement funds upon emigration will be subject to a different process.
The Budget Review touted the change as one that is purely a product of impending changes to the exchange control regime in South Africa and that they want to ?phase out the administratively burdensome process of emigration through the South African Reserve Bank.? That may have been the case but the surge in financial emigration applications filed in the wake of the expat tax could have played some part as well.
Based on the Budget Review, everyone expected the change to be directed at procedure only, but with the publication of the draft tax Bills it was revealed that the ?phasing out? of financial emigration meant something more profound. In terms of the final tax Bill tabled in Parliament, a person will only be permitted to withdraw their retirement funds if they can prove they have not been tax resident in South Africa for at least three years.
The cited purpose of moving to a more modern and less burdensome process is at variance with the new test. By any measure, a lock-in of three full years is more draconian than the current process. National Treasury and SARS? response document stated the reason behind the three-year lock-in as a preventative measure against cases where individuals withdraw their retirement funds under pretence of emigration, only to return to South Africa shortly after.
The validity of National Treasury?s argument is questionable, as it tries to prevent a mischief that will only occur in a handful of cases to the detriment of the majority who genuinely intend to emigrate permanently and who may need their retirement funds to finance their relocation. Then there are problems with the new proposed test itself. Determining residency is not a tick box exercise and considering the burden of proof rests with the taxpayer, the question is what will be accepted as proof of cessation of residency? This is yet to be confirmed.
Time is running out
National Treasury made a concession to allow for financial emigration applications filed before the effective date of 1 March 2021 to be finalised under the old dispensation. Those who miss the boat, however, will be subject to the new uncertain process.
The legislative interventions aimed at expatriates arguably form part of a bigger picture. Seemingly, government is trying to manage a fragile but equally important segment of the tax base with ongoing policy changes. We foresee that the role of tax practitioners will become extremely important for any international employee to have a fully compliant, yet tax-optimised, approach to their taxes.
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This article first appeared on Jan/Feb 2021 edition of Taxtalk