Alert: South Africa amends law regulating exemption of foreign earned income

South Africa has amended the current law regulating the exemption for foreign-earned income as applicable to South Africa tax residents. Currently, as described in Section 10(1)(o)(ii) of the Income Tax Act, tax residents meeting the eligibility requirements may exclude all foreign-earned income from South Africa taxation. An amendment to the code, effective March 1, 2020, introduced a limited exemption of 1 million South African rand (ZAR) (around $63K) annually. Income in excess of 1M ZAR will be subject to South Africa taxation but may be mitigated by foreign tax credits (FTC), when applicable. The eligibility requirements remained the same: 183 days in 12-month period and more than 60 consecutive days of services outside South Africa.

The rules for claiming FTC include:

• No reduction to withholdings in anticipation of FTC — cash flow issues
• FTC limited to the lesser of foreign tax or South Africa tax
• Proof of foreign tax paid or payable

It’s important to note that this amendment will affect employers, foreign employers, and residents.

South Africa employers:

• Required to implement withholdings on income in excess of 1M ZAR
• Currently, no reduction to withholding in anticipation of foreign tax credit. Follow new developments as this may change.
• Evaluate additional cost of global mobility programs with outbound South Africa residents to locations with lower tax rate or no income tax.

Foreign employers:

• Facilitate the proof of tax payment/tax payable to inbound South Africa residents
• No requirement for income tax withholdings/remittance

South Africa residents:

• Additional tax may be due in South Africa if foreign-earned income in excess of 1M ZAR and foreign income tax rate is lower than South Africa income tax rate.
• Additional administrative task related to obtaining proof of foreign tax paid/payable required in order to claim FTC.
• Consider the impact of breaking tax residency in South Africa on the global tax rate over the assignment period.
  • Residency may be broken
    • By becoming exclusively a tax resident in another country with which South Africa has a DTA
    • By breaking “ordinarily residence,” as South Africa is no longer seen as their permanent home
• Exit tax of 40 percent on gain on deemed disposition of assets may be due when relinquishing residency (Evaluate this decision carefully.)