Tax Obligations of South African Tax Residents on Foreign Income
Taxation on foreign income can feel like piecing together a puzzle, especially when tax credits, exemptions, and deductions vary depending on an individual’s time spent abroad, income level, and tax treaties. While many taxpayers assume that taxing foreign income in another country releases them from South African tax obligations, the reality is more nuanced. Below, we examine the tax responsibilities of South African tax residents when earning income abroad and explore relevant tax exemptions and agreements explaining how practitioners can effectively manage these factors to maximise their clients' tax benefits.
Tax Obligations of South African Residents
South Africa operates on a residence-based taxation system, meaning that residents are taxed on their worldwide income, regardless of where it is earned. This obligation is anchored in Section 1 of the Income Tax Act No. 58 of 1962, which defines a resident and establishes the scope of taxable income.
Under Section 5(1), every person who is a resident of South Africa is liable to pay income tax on all amounts received or accrued from both South African and foreign sources. This comprehensive approach ensures that residents contribute to the national revenue based on their global earning capacity.
The Exemption Under Section 10(1)(o)(ii)
To alleviate the potential double taxation burden on residents working abroad, Section 10(1)(o)(ii) of the Income Tax Act provides an exemption for certain foreign employment income. The critical requirements for this exemption are:
Employment Income: The income must be remuneration for services rendered outside South Africa.
Qualifying Period: The taxpayer must be outside South Africa for:
At least 183 full days during any 12 months, and
At least 60 continuous days within that period.
If these conditions are met, the foreign employment income up to R1.25 million is exempt from South African income tax. Any amount exceeding this threshold is taxable in South Africa. The intention of this provision is to encourage South African residents to engage in international employment opportunities without facing undue tax hardship at home. However, if the foreign income earned exceeds ZAR1.25 million, this section impacts the allowable foreign tax credit.
Relevance of the Double Taxation Agreement (DTA)
South Africa has entered into Double Taxation Agreements (DTAs) with numerous countries, including the Democratic Republic of Congo (DRC), to mitigate the risk of being taxed twice on the same income. DTAs function to:
Allocate Tax Rights: They establish which country has primary taxing rights over specific types of income, especially if the taxpayer is considered a resident of both countries.
Reduce Tax Burden: The DTA enables taxpayers to claim relief on foreign income through tax credits or exemptions.
In the case of employment income from the DRC, the DTA between South Africa and the DRC allows South African residents to claim a foreign tax credit for DRC taxes paid, reducing their South African tax liability on that income. However, the DTA does not imply that income earned in the DRC is entirely exempt from South African tax; instead, it ensures that tax credits are applied to prevent double taxation.
Deductibility of Withholding Tax and Foreign Tax Credits
When income earned abroad is subject to withholding tax, Section 6quat of the ITA provides a framework for claiming a tax credit on the foreign tax paid. However, the credit is subject to a cap, calculated as:
This formula prevents the foreign tax credit from exceeding the tax that would be payable on the foreign income in South Africa. For example, if the effective foreign tax rate exceeds the South African tax rate, the excess amount is forfeited, highlighting the importance of correctly calculating eligible credits.
This formula prevents the foreign tax credit from exceeding the tax that would be payable on the foreign income in South Africa. For example, if the effective foreign tax rate exceeds the South African tax rate, the excess amount is forfeited, highlighting the importance of correctly calculating eligible credits.
Practical Example: Ms. Jacobs in the DRC
Let’s look at Ms. Jacobs, a South African tax resident employed by GlobalTech Services in the Democratic Republic of Congo (DRC). For the 2024 tax year, she spent 240 days outside South Africa, including 75 consecutive days, qualifying for a partial exemption on foreign-earned income under Section 10(1)(o)(ii) of the Income Tax Act.
Income and Tax Details
Total Salary Earned: $200,000, converted to ZAR 3,600,000 (assuming an exchange rate of 1 USD = 18 ZAR).
Foreign Tax Paid: $40,000, converted to ZAR 720,000.
Taxable Income After Exemption: ZAR 3,600,000 - ZAR 1,250,000 exemption = ZAR 2,350,000.
South African Tax Liability on Taxable Income: ZAR 884,339 (at the applicable tax rate).
Step 1: Apply the Section 10(1)(o)(ii) Exemption
Under Section 10(1)(o)(ii), Ms. Jacobs is eligible for an exemption of ZAR 1,250,000 on her foreign income, since she spent over 183 days abroad and met the 60 consecutive days requirement. This reduces her taxable income in South Africa to:
Taxable Income in South Africa = Total Foreign Income − 10(1)(o)(ii) exemption = 3,600,000 − 1,250,000 = ZAR2,350,000
Step 2. Apportion the Foreign Tax Credit
The foreign tax credit under Section 6quat is capped at the South African tax liability on the taxable portion of Ms. Jacobs' foreign income, and SARS typically applies an apportionment formula. Here’s how to calculate the allowable foreign tax credit:
Total Foreign Income: ZAR 3,600,000
Foreign Tax Paid: ZAR 720,000
South African Tax Liability on Taxable Income: ZAR 884,339
The allowable foreign tax credit is reduced with the apportioning the South African tax liability relative to the taxable portion of the foreign income:
Percentage of income exempt = ZAR 1,250,000 / ZAR 3,600,000 = 34,72%
Percentage of allowable foreign tax credit = ZAR 720,000 × (1-34,72%) = ZAR 470,000
Summary of Ms. Jacobs’ Tax Situation
Total Salary Earned: ZAR 3,600,000
Foreign Tax Paid: ZAR 720,000
South African Tax Liability on Taxable Income: ZAR 884,339
Allowable Foreign Tax Credit: ZAR 470,000
Additional tax payable: ZAR 414,339
Conclusion
In Ms. Jacobs’ case, the Section 6quat foreign tax credit was apportioned to match her South African tax liability on the taxable portion of her foreign income, resulting in an allowable foreign tax credit of ZAR 470,000. The Section 10(1)(o)(ii) exemption of ZAR 1,250,000 significantly reduced her taxable income, but the apportionment formula also limited the foreign tax credit. This example highlights the importance of calculating foreign tax credits and exemptions to determine net South African tax payable accurately.
Become a licensed tax practitioner with CIBA and be able to provide tax services to your clients.
CIBA’s Licensed Tax Practitioner: Compiler
The Compiler license validates the holder's ethical practice and basic competency in tax compliance, making it ideal for professionals looking to affirm their capability to manage general tax services for individuals and entities. Key functions include:
Handling tax returns, records, and objections.
Managing early-stage SARS queries and audits.
CIBA’s Licensed Tax Practitioner: Advisor
The Advisor license represents a superior level of tax expertise, essential for those dealing with complex tax situations in large businesses and trusts. This advanced credential confirms the practitioner’s ability to:
Navigate intricate tax laws.
Provide expert tax advice and write opinions.
Oversee comprehensive tax issues including corporate and payroll tax matters.
Obtaining these licenses from CIBA not only enhances professional credibility but also equips practitioners with the necessary skills to handle a broad spectrum of tax-related duties effectively.
