Repeal of foreign employment income exemption

By: Arnaaz Camay, Senior Executive, and Rui Lopes, Candidate Attorney, Tax Practice, Baker McKenzie Johannesburg

Currently, remuneration accruing to an employee while working abroad is exempt from tax in South Africa, if the employee is abroad for more than 183 days and 60 continuous days during a 12 month period. In the 2017 Budget Speech, it was announced that this exemption will apply only if the remuneration is subject to tax in a foreign jurisdiction.

However, in the draft Taxation Laws Amendment Bill (TLAB) published in 19 July 2017, National Treasury went further and proposed that the exemption be removed in its entirety with effect from 1 March 2019 regardless of whether the remuneration was subject to foreign tax. Accordingly, it was suggested in the TLAB that tax will be imposed on remuneration paid to employees while working abroad, irrespective of how long the employee works in the foreign jurisdiction.

The vast majority of South Africa’s tax treaties, if not all of them, respect South Africa’s right to tax the employee’s remuneration under these circumstances, subject to the employee being allowed to claim any foreign tax as a credit against the South African tax.

Following the public comments on the draft TLAB 2017, and because the proposal will severely negatively impact on finances, and remittances to South Africa, especially for those on relatively lower incomes, the National Treasury made an announcement in this regard on 14 September 2017. Treasury announced that the proposal will be changed to allow the first R1 million of foreign remuneration to be exempt from tax in South Africa if the individual is outside of South Africa for more than 183 days as well as for a continuous period of longer than 60 days during a 12 month period.

The imposition of the exemption threshold should reduce the impact of the amendment for lower to middle class South African tax residents who are earning remuneration abroad. The effect of the exemption will also be that South African tax residents in high income tax countries are unlikely to be required to pay any additional top up payments to SARS. In addition, to allow greater time for individuals to either adjust their contracts or their circumstances and to finalise or formalise their tax status, the effective date of the proposal was extended to 1 March 2020.