By Amanda Visser

National Treasury has proposed an administrative tweak to the amended foreign income tax exemption that is aimed at alleviating future cash-flow problems. In terms of the amendment, which will become effective in March next year, South Africans working abroad will be taxed on foreign remuneration which exceeds the R1m threshold.

In terms of the Income Tax Act, South African employers are obliged to withhold employee’s tax (pay as you earn – PAYE) when they pay their employees’ remuneration. Thus, once the amendment is effective, this may result in double taxation: the South African company will have to withhold tax on remuneration earned abroad, and the host country will also withhold tax on the same remuneration.

In this year’s budget review, National Treasury proposed that South African employers be allowed to reduce the monthly local PAYE withholding by the amount of taxes withheld on the employer’s foreign income to prevent double withholding. Jaco la Grange, associate tax director at Deloitte, said in an interview one of the budget proposals seem to suggest that the obligation to withhold PAYE may well be extended to non-resident employers, even if there is not a South African agent paying remuneration on their behalf. He referred to the South African Revenue Service’s (SARS) employers guide which states that employers who are satisfied that their employees will meet the criteria to qualify for the tax exemption on their foreign income are ‘at liberty’ not to deduct employees’ tax. The employer must keep a copy of each page of the employee’s passport and a copy of the relevant contract for the services to be rendered in a foreign country. ‘Should it transpire that the employee does not qualify for the exemption, the employer will be held personally liable for any losses that SARS may suffer due to the non-deduction of the full amount of employees’ tax,’ the guide states.

La Grange, who chairs the personal tax workgroup of the South African Institute of Tax Professionals (SAIT), said if the South African employer is convinced that his employee will comply with the criteria set out in the act, it may elect not to withhold tax on the foreign remuneration. However, if the individual does not qualify, South African employee’s tax will have to be withheld on the full amount. In most instances monthly payroll withholding will also be done in the host country. ‘Currently, only certain deductions are allowable, such as retirement fund contributions,’ says La Grange.

Foreign tax credits are not an allowable deduction and cannot be considered when calculating the amount of tax that must be withheld. This causes severe cash flow problems. Foreign taxes that have been paid can only be recovered when the South African employee submits his tax return.

If the proposal is implemented, the foreign tax credit may be taken into account when determining the employees’ tax that must be withheld in South Africa. Employers and tax bodies have expressed concern about the administrative burden of proof placed on the taxpayer to be able to claim the foreign tax credit. La Grange said in terms of the act, the taxpayer must prove that tax payable on the foreign income has been paid to be eligible for a foreign tax credit in South Africa. SARS normally only accepts an income tax assessment from the host country. ‘The complication is that in many other countries, especially African countries, taxes on remuneration are only paid via payroll.’ This often does not come with any proof of payment such as a statement of account or a tax certificate (IRP5), which is customary in South Africa. The problem is further exacerbated by the fact that in many countries no annual personal income tax returns are required and assessments to individual employees are not provided.

Treasury said before the proposal is implemented, a workshop (scheduled for 6 March) will be held to consult taxpayers on their administrative concerns. Any resulting amendments will be processed during the 2019 legislative cycle. Tax Consulting SA and SAIT have been advocating for more substantive relief such as the exclusion of certain benefits like housing or security from remuneration. They also voiced their concerns about expressing the limitation on foreign tax-free income in Rand terms.