Since the beginning of April South Africans have been swallowing the bitter bill of multiple tax increases. However, the biggest impact for taxpayers has been the increase in the Value Added Tax (VAT) rate, from 14% to 15%. This is the first increase in 25 years.

South Africans living abroad – who remain tax resident in South Africa – will also feel the pinch of this increase, says Charles de Wet, Head of Indirect Taxes at PricewaterhouseCoopers (PwC).

Many South Africans living and working abroad on secondments or long-term contracts continue to use some services from local providers. This includes insurance contracts on a family home or vehicle and even household items being stored. Some may even have kept their contracts with cell phone service providers. Like other South Africans they will now pay the increased rate of 15% on these services. The only instance where a service provider is not entitled to increase the rate is when the contract stipulates that the VAT rate remains at 14% for the duration of the contract.

In its February budget, the National Treasury said the increase is necessary to meet new spending commitments – such as the announcement of fee-free tertiary education – and to prevent the further “erosion of public finances”. Treasury acknowledged that the VAT increase will raise the cost of living for all households (those living both in and outside South Africa). However, the wealthiest 30% of households contribute to the bulk (85%) of VAT revenue, it said in February.

De Wet says cutting the benchmark repo rate (the rate at which the South African Reserve Bank lends money to commercial banks) will offer relief for households with monthly home and car instalments. The repo rate was cut by 25 basis points, to 6,5%. Taxpayers living abroad, who still have debt repayment obligations in South Africa, will benefit from the lower lending rate. Many people have kept their family home and car, and those who are still paying the bond and the monthly repayment on hire purchase will benefit from this rate cut.

Further, De Wet explains that the cost of servicing debt would ease, leaving more money in people’s pockets to offset the VAT rate increase. The fact that there is already a commitment to relook the zero-rated items will offer relief for poorer households. De Wet notes that where a service is physically rendered outside of South Africa, it is zero rated for VAT purposes. The increase in the VAT rate therefore does not affect the zero rating of services rendered outside of South Africa.

For estates worth R30 m or more, South Africans living abroad but who have remained tax resident will also be affected by the increase of estate duty rates from 20% to 25%.