The implications of the above can lead to employees being taxed by SARS and by the country where their employer is located.
South Africa’s residence-based system
South Africa uses a residence-based tax system, which means that South African tax residents will be taxed on worldwide income (including all South African sourced income). Tax non-residents will only be taxed on South African sourced income and certain capital gains. Citizenship, therefore, has minimal to no impact on how a person will be taxed, tax residency is what determines the tax regime applicable.
Statutory Provisions
Section 9 of the Income Tax Act (“The Act”) provides certain scenarios in which the source of income is considered to be located in South Africa. The following sources of income are set out by The Act –
Common Law Provisions
There are some sources of income that do not fall within the ambit of The Act and the principles of the common law must be applied in these instances. The following sources of income will therefore be determined by the application of these principles (keeping in mind there is always nuance) –
Treatment of South African sourced income
It is important to note that South African sourced income will always be taxable, the fact that the employee is a tax non-resident will have no effect on this. It is therefore important to be cognizant of this fact when engaging with your foreign employer in terms of tax payable on your salary.
The deciding factor, which is the approach that SARS takes in determining where the income is sourced, is to determine where the service was rendered to “earn” the employee’s income. To assist the taxpayer in circumstances where they will be “double taxed” by SARS and the foreign country, there is relief provided for in Section 6quat of the Income Tax Act; although, full tax reduction is, in practice, unlikely.
It is suggested that, if working remotely while in South Africa, the taxpayer ask their foreign employer to consider their remuneration (earned for workdays spent in South Africa) as non-taxable in that foreign country, as the source of income will be in South Africa.
The same result will occur if the employer is a South African company, and the employee is working in a foreign country. The employee could in effect be double taxed and this may lead to an administrative nightmare with continuous disputes and requests on both sides of the pond. The best approach, and the approach recommended by SARS, is for the relevant employer to change the source code to reflect the tax status and liability of the taxpayer; for example, where appropriate, as non-taxable foreign income.
However, it must be cautioned that income earned in any country cannot merely be treated as non-taxable on the basis that the source of the income is not in that country. The principles of tax residency and the applicable income source rules must be properly, and carefully, applied in each case.
It is recommended that you consult with a qualified tax practitioner ahead of the new tax season opening 1 July 2022.
