EXPATRIATE PETITION GROUP

Transcription

1 EXPATRIATE PETITION GROUP Change to 183-and-61 day test Tax Law Process and Resultant Planning Presented by: Jerry Botha

2 BRIEF HISTORY 4 years ago rumours that wanting to change expatriate tax law 2017/18 Budget Review Announcement, effective 01 March 2018 Draft Tax Law, effective 01 March 2019 National Treasury Submissions Amended Law Promulgation of Tax Change, effective 01 March 2020

3 RUMOURS OF LAW CHANGE Change is definitely instigated from SARS perspective. Initially was announced as to prevent Economic Double Tax, but this completely misplaced concept emanating from the OECD and was never intended to even apply to individuals. Parliament submission by SARS that less than 4,800 expatriate tax returns received, i.e. those correctly claiming 183-and- 61 day tax exemption in South African returns. (See slide 46) Compared to financial emigration record and the numbers do not add up. Either non-compliance on tax rife vs. non-compliance with South African Reserve Bank ( SARB ) and SARS formalities of financial emigration.

4 2017/18 BUDGET ANNOUNCEMENT Amending foreign employment income-tax exemption in respect of South African residents Currently, if a South African resident works in a foreign country for more than 183 days a year, foreign employment income earned is exempt from tax, subject to certain conditions. This exemption is for employees of private-sector companies. In terms of the residence-based system of taxation, South African residents are taxed on their worldwide income. However, this exemption on foreign employment income appears excessively generous. If a resident works in a foreign country for more than 183 days with no tax payable in the foreign country, that foreign employment income will benefit from double non-taxation. It is proposed that this exemption be adjusted so that foreign employment income will only be exempt from tax if it is subject to tax in the foreign country. (emphasis added)

5 BIG 4 SUBMISSION TO NATIONAL TREASURY/ SARS Submission placed in public domain by SAIT SARS / National Treasury response not made public.

6 DRAFT TAX LAW AMENDMENT Announced National Treasury 18 July 2017 Proposed effective date 01 March 2019 Proposes that exemption be repealed completely!

7 NATIONAL TREASURY SUBMISSIONS Expatriate Petition Group Started by Barry Pretorius from working in the UAE 20,000 plus members and 14,000 signatories of petition Surprising diverse range of races and background Encouraged members to make personal written submissions to National Treasury on hardship this will cause Technical submission done to Parliament

8 PROBLEM STATEMENT South Africa keeps tax residency open until you are not ordinarily resident in South Africa Few countries are keeping tax residency so far open-ended as South Africa (United States notable different). Tried and tested balances where tax residency retained (e.g. United States foreign exclusion USD 102,100 per annum)

9 IMPACTS THE WHOLE PROFESSIONAL LIFECYCLE

10 WHO IS IMPACTED? Expatriate personally Impacts retirement planning and burden on state Massive support structure back in South Africa, including parents, children and wider family Invest back in South Africa with money transfers, property, policies etc. Employers with international secondment programmes

11 LARGEST STUMBLING BLOCK Non-compliance by South Africans abroad Questioned prosecution statistics Tax diagnostic process Tax practitioners / SARS Call Centre & even SARS written confirmations

12 ARGUED ECONOMIC CONSIDERATIONS This will cause more harm than good Attacked specific examples

13 YOUTH AND THOSE SEEKING INTERNATIONAL EXPERIENCE There are many valuable contributors to South African society who gained international experience, including employees of government, multi-nationals, non-profit organizations, National Treasury and SARS. Whilst everyone s path is obviously different, we shall make a simple example of a South African working student or newly qualified professional working in the United Kingdom. The person is intending to return to South Africa and also makes the tie-breaker in favor of South Africa, on application of the DTA, thus a South African tax resident who will, on the proposal, not be exempt from South African tax and only United Kingdom tax credits may be claimed. The example is made of a low earner in the United Kingdom and earning, as an employee, the same as the personal tax threshold for 2017/18 being GBP11,500. Here therefore no tax liability hereon and using a ZAR17:GBP1 conversion rate (which is very favorable considering SARS average published tables) would be translated under section 25B(2A) to R195,500. The South African tax threshold for similar period is R75,750, thereafter a 18% up to R189,880 and then 26%. This means SARS would under the new rule be obligated, as it is creature of law and bound to enforce the new provision, raise taxes on the person of R22,017 (R195,500 R189,880 x 26% + R34,178 rebate of R13,635). This R22,017 would not only be unaffordable for most students, but show that the sovereignty of tax jurisdictions thresholds and rules are based on the cost of accommodation, transport and living in that country. We are not aware of any country world-wide that introduce tax policy which makes it harder to study or gain international work experience. Even the United States would use their foreign earnings exclusion of USD101,300 per annum, to create a safe haven for their tax residents, thus there would be no additional taxes payable to the IRS before you are not earning over this threshold.

14 RISKING THOSE WITH A RETIREMENT PLAN AND ALIENATING THEM FROM RETIRING IN SOUTH AFRICA Expatriate Life Style is a sacrifice for expatriate and family. Tax aggressive planning vs. simply remaining abroad and retiring in Mauritius / Portugal / Malta etc.?

15 SOUTH AFRICA AS GATEWAY TO AFRICA There have been very specific enactments of law passed to promote South Africa as a gateway to Africa, expansion of South African business interests into Africa, including tax and exchange control measures to enable this. Most African locations have a much lower income tax rate and lesser developed system of taxing allowances and fringe benefits, actually we are not aware of any higher personal income tax rates and taxing of fringe benefit provisions in Africa than South Africa. This change will impact the ability of South Africans to expatriate on fixed term contracts for South Africa, and make employees of other jurisdictions more competitive than our own.

16 MIGRANT WORKERS There are many South Africans who work internally, not by choice, but as a simple means of earning a family back home. They are on rotation, working a fixed period outside, often on site, and then returning home for a couple of weeks. Examples include where they work on sponsored infrastructure projects, foreign government projects, charitable work, security related industries, there is often no tax payable in the foreign location. Branding these expatriates as not paying tax anywhere is a simple misunderstanding of how these projects work. Where projects are agreed by international sponsors or direct or indirect government enablement, special tax dispensations are agreed upfront. This is an example of using tax policy to stimulate growth, i.e. instead of employee tax and social security adding a cost layer, the agreement is that the funding will be given on proviso of tax exemption. There is no equivalent exemption in South Africa, thus South African workers will be placed at significant disadvantage.

17 ECONOMIC DOUBLE TAX Where an expatriate works in the UAE, there is no personal income tax, but this does not mean there is higher taxes than South Africa. The same as South Africa charges 50c in the R1 for petrol and 42 for diesel, the UAE comes with very high consumption based taxes, for example, rental in the UAE has been confirmed by some sources as 300% as high as South Africa, which includes a tax component. The same principle applies in many other jurisdictions where they have a social security system and, unlike South Africa, fund their social security costs from a separate social security tax and not necessarily income tax.

18 NURSING EXAMPLE Certain commentators in the Media who serve on the Davis Tax Committee, has indicated that they support this tax proposal and used the example of a nurse who travels for overseas for 6 months of the year to work. Their expressed view is there is no good reason why this person should be exempt from paying tax, compared to a nurse who works in South Africa. Where this is indeed the formulators of tax policy view, we should all be alarmed by the narrowness of perspective by some who are appointed as custodians of policy. The sacrifice working from home earning currency to support a family back home, is simply not on which the objection turns. The costs imbedded to enable a commuting lifestyle are not something which can be avoided. The realities include accommodation costs which is a duplicate cost as the South African home is maintained, cost of living is high and when you pay R100 for a tomato this is a bargain in some jurisdictions (if you can find one), connectivity to back home and so forth, all costs the local nurse would not have.. These expatriates must be on fixed term employment contract, otherwise the current section 10(1)(o)(ii) exemption does not apply. There is a very clear limitation of deduction of expenses for employees under section 23(m), including the expenses noted in example. The expatriate would be taxed on gross employment income and no deduction allowed for actual and direct expenses incurred in the production of said foreign employment income.

19 TAX TREATY EXEMPTION The residency test allows for a treaty tie-breaker on tax residency. Simply put, where a taxpayer which would otherwise be tax resident in South Africa, qualifies to be tax resident exclusively in another country, in terms of the double tax agreement (hereinafter DTA ) between South Africa and that country, then the taxpayer would be resident in another country. The Draft Explanatory Memorandum specifically notes this relief and references the 78 DTA s South Africa has in force. We note the following on the DTA relief as a viable control mechanism o There are 193 countries in the world, depending on whether certain jurisdictions are recognized by South Africa. This upshot is that more than half of the countries world-wide does not have a DTA negotiated with South Africa, so for South African expatriates in these locations, they do not have the DTA exclusion as an alternative. o We submit that both National Treasury nor SARS has any current available on how many South Africans abroad are legitimately non-resident and due to DTA relief. The basis for this submission is simply that this question has never been posed before as part of tax return submissions, therefore, the extent of reliance hereon is currently an unknown for SARS.

20 TAX TREATY EXEMPTION (cont.) o Where this requires an embedded part of the tax filing process, we presume that this becomes an annual filing process, with its own cost and administration process. Tax residency must be proven on an annual basis and we submit that in discharging the onus this of proof every affected taxpayer will have to (a) submit proof of tax residency in another country, (b) evidence that the DTA tie-breaker clause operates in favor of the other country and not South Africa. o Obtaining these tax residency certificates are not for free in many locations and in the UAE this is roughly R8,000 per year, which is also a non-tax deductible item under current tax rules. o The complexity of a continuous compliance with CGT deemed disposal rules must also be factored, including on career expatriate who has gaps in service due to end of contracts. This means when they can prove DTA residency, there is a deemed disposal for CGT, the next year there is gap in service.

21 FRINGE BENEFITS Where the section is allowed to pass in its current format, there will be inadvertent complexity created by the current wording of the Seventh Schedule dealing with the quantification of fringe benefits. There are plenty of fringe benefits which will be created by our current law, which will be exempt in various host country jurisdictional systems. Simply put, in the host jurisdictions certain items will be deliberately exempt from tax whilst as part of their tax policy, but not bear equivalent exemption in South Africa. An example would be company provided vehicle with a driver and / or security detail provided in the host country for the expatriate and / or family. These are often compulsory in high-risk territories. There is no tax in the host countries hereon. However, under current wording of South Africa law, where not covered by an exemption section, this would be fully taxable as a fringe benefit.

22 ALLOWANCES The exact same considerations noted on fringe benefits also apply for various types of allowances. In many locations employees are paid special allowances which enables employment, which are either taxed at preferential rates or exempt from tax. These allowances would be fully taxed in South Africa, with no tax deduction due to section 23(m) limitation and also limited or no tax credit to claim, due to the host country exemption. Examples hereof would include housing allowance, travel allowance, per diem allowances, etc.

23 OTHER ITEMS Independent contractors vs Employees Tax evasion schemes Non-compliance does not get corrected with an unjust rule of which there is no equivalent in the world. Non-compliance gets corrected by a world class Revenue Authority which finds those who are non-compliant and holds them fully to account for the benefit of all South Africans. Barry Pretorius, Parliament, August 2017

24 PARLIAMENT

25 SUPPLEMENTARY SUBMISSION AFTER PARLIAMENT Expatriate group poll 2,5 days 4013 responses

26 EFFECTIVE RATE OF FOREIGN TAX PAID

27 HIGHEST MARGINAL RATE IN FOREIGN COUNTRY

28 MINIMUM DAYS OUTSIDE

29 EARNINGS LEVEL

30 EXISTING CONTRACT ARRANGEMENT

31 SOCIAL SECURITY

32 WOULD YOU CONSIDER FINANCIAL EMIGRATION?

33 NATIONAL TREASURY RESPONSE

34 NATIONAL TREASURY RESPONSE

35 NATIONAL TREASURY RESPONSE

36 NATIONAL TREASURY RESPONSE

37 NATIONAL TREASURY RESPONSE

38 NEW LAW WORDING ALREADY PROMULGATED

39 DOUBLE TAX AGREEMENT RELIEF Tax resident in South Africa and another Double Tax Treaty Country Conflicting demands of two DTA s resolved through a tie-breaker test International standard is OECD Model, so all treaties effectively read the same (some exceptions, based on old OECD law, Common Wealth practices, United States protocol etc.)

40 TIE BREAKER

41 ISSUE WITH DTA CLAIMS Who has done this? Cost / Effort to obtain other countries DTA certificate SARS does not have to automatically accept still have to apply tie-breaker clause Where you do not meet requirements to do financial emigration very tough to pass onus of proof MAP (Mutual Agreement Procedures) process where a dispute between two countries

42 FINANCIAL EMIGRATION Intention that South Africa no longer your real or main home (expatriate agreements may conflict) Once-off SARS / SARB process and on record that status change, including Emigration Tax Clearance certificate Still CGT deemed disposal trigger and limitation on how use South African Bank Account Long term tax benefits (CGT, donations tax, retirement planning, estate planning) Claudia Aires (Claudia@financialemigration.co.za, ) and Jonty Leon (Jonty@financialemigration.co.za, ) See for more details.

43 FINANCIAL EMIGRATION Specifically referred to and encouraged by National Treasury / SARS in response document

44 IS SARS GEARING UP? New SARS Interpretation Note 16 (Issue 2) February 2017 section 10(1)(o) test New SARS Interpretation Note 3 (Issue 3) 20 June ordinarily resident New SARS Interpretation Note 4 (Issue 5 03 August 2015 physical presence test Personal tax return disclosure change

45 ACTIONS EMPLOYER OF FOREIGN WORKER Investigate your remuneration package Tax equalized vs. tax protected vs. gross pay irrelevant it is someone s problem Look at especially expatriate benefits which will translate to fringe benefits Expatriate accommodation Home security Vehicle Driver Children school fees and transport services Home leave trips Insurances Medical aid Tax Services Etc.

46 ACTIONS EMPLOYER OF FOREIGN WORKER (cont.) Consider all allowances - Cost of Living Hardship Other location allowances Tax free per diems etc. Add incentives, such as bonusses and share scheme gains What will the extra tax cost be, with and without gross-up? I need examples of these please for National Treasury submission

47 ACTIONS EMPLOYER OF FOREIGN WORKER (cont.) Below R1m = not a problem Above R1m but enough foreign tax credits = not a problem Identify problem cases I need examples please for National Treasury submission Note: Must check that your expatriates are tax compliant as 95% plus of returns appear incorrect tax claims done (see SARS / National Treasury Statistics). Tax Diagnostics done by Winnie Gatare (winnie@financialemigration.co.za, ) and Nicolas Botha (Nic@financialemigration.co.za, ).

48 TYPICAL ACTIONS - EMPLOYERS Expatriate Assignment Strategy R1m per year, so where engagement starts in August 2020 and end September 2021 = R1m in 2020/21 year and another R1m in 2021/22 year. Segmentation of Expatriates a. Below R1m b. Sufficient credits for zero liability c. Tax treaty exemption countries and expatriates d. Financial emigration (significant personal tax and financial benefits) e. Remainder = problem positions and consider package and benefit structuring f. Contractor solution = lower tax but not completely exempt (Jerry Botha requests examples) Expatriate Communication Expatriate Policy Change / Cost Calculator Change

49 ACTIONS - COLLECTIVE National Treasury Submission Taxable fringe benefit and allowance examples Social security cost examples (especially employee contributions) Exchange Rate fluctuations Countries where tax credits a problem SARS admin issues around hardship Where business case is against South Africans and you rather use foreigners Other good ideas? Share what we find amongst one another, per country examples

50 DISCUSSION / QUESTIONS

51