During 2017 there was a lot of talk about the possibility that the exemption applicable to foreign employment earnings is going to be repealed. This led to a lot of uncertainty regarding the tax implications for South Africans working abroad.
South Africa’s tax system is based on the principle that residents are taxed on world-wide income. This implies that a resident will be taxed on all income earned, even if it is earned abroad. In the past, this created the problem that the same foreign employment income was taxed twice – in South Africa as well as in the foreign country. To solve the problem of double taxation, the section 10(1)(o)(ii) exemption in the Income Tax Act was originally introduced in order to prevent double taxation of the same employment income between South African and a foreign country.
This effectively meant that if a South African resident earned foreign employment income and that South African resident complied with the requirements of section 10(1)(o)(ii) (that person was outside of the Republic for more than 183 days, of which 60 days were continuous), the resident will effectively not be taxed on the foreign employment income in South Africa.
The motivation for the possible scrapping of this section is due to the fact that this exemption can be seen as redundant by some, since South African has already signed 78 Double Tax Agreements up to date. Because the purpose of a Double Tax Agreement is to prevent double taxation of the same income by allocating taxing rights between the source state and the residence state, the foreign employment income can now possibly not be taxed at all. This is because the section 10(1)(o)(ii) exemption and the DTA serve the same purpose.
The good news is that section 10(1)(o)(ii) was not repealed as a whole. The section was amended to exempt up to R1 million’s foreign earnings by a resident. As a result, all South African tax residents earning above the R1 million threshold will be subject to tax on foreign employment income earned in respect of services rendered outside of South Africa. The effective date for the amended section is 1 March 2020, which will give affected taxpayers a chance to prepare for the adjustment.
There will still, however, be relief from foreign taxes paid on the foreign income under section 6quat of the Act.