Employers, employees, Sars — who really gets the new expat tax?

As of March 1 2020, the amendment to the “expat exemption” of the Income Tax Act will bring considerable change to the expat landscape. With less than six months to go expats, their employers — and maybe even Sars employees — are scrambling to fully understand the implications.

For those still in disbelief, the amendment to the act was promulgated on December 18 2017. In March 2019, the National Treasury held a workshop where, in no uncertain terms, it was communicated that the law would come into effect as planned. This was confirmed when the Draft Taxation Laws Amendment Bill was released, which did not contain any further proposed amendments to the expat exemption.

In the 2017 Taxation Laws Amendment Bill it was announced by the Treasury that the expat exemption would be repealed in its entirety — meaning that the totality of an expat’s income earned abroad would be subject to tax in SA. This perturbed the expat community, their employers and other stakeholders in opposition to the amendment. Following presentations to the parliamentary standing committee on finance and many submissions and workshops later, expats were begrudgingly handed the R1m per annum exemption and an extension to the effective date of the amendment, being March 2020.

Many expats still do not have clarity on what exactly will be taxable once the amendment takes effect. However, it must be understood that expats’ entire remuneration will be taken into account. What this means is that if they remain tax resident, they will be taxed fully on any allowances and benefits, as if they were just a normal employee working in SA.

The consequence for the expat is likely that the R1m exemption may be exhausted rather rapidly. This will specifically be the case where their employer pays for “benefits” such as security costs or drivers, international school fees, medical insurance or housing, even though these may not provide any economic benefit to the expat.

The amendment will undoubtedly result in an additional tax liability where expats earn above a certain threshold. The question is, who will pick up the tab? The reality is that in many instances company policy (such as tax protection or tax equalisation) would dictate that employees’ take-home pay will be guaranteed, irrespective of their expatriation.

These policies are necessary to ensure that companies can continue to attract and retain high-value resources. In these instances, the additional tax cost will be borne by the employer. This simply means that SA expats come at a higher cost, which, in the current economic climate, may lead to those employers setting their gaze on resources from jurisdictions with less punitive tax regimes. With this being the case, our talent pool will lose on invaluable international exposure.

For those of us back home, we may need to consider what the expats would do if their employer did not step in to alleviate the extra burden. These expats may simply decide to sever their ties with SA and cease their tax residency. In the long term, these individuals represent an important segment of our tax base and with their departure the struggling fiscus would have to look at those who remain to make up the shortfall.

In addition to possibly having no choice but to pay their employees more, employers of expats are unsure how the amendment should be administered from a payroll perspective. Employers have to ensure they withhold PAYE correctly, which is likely to be tricky if they do not want to prejudice the employee by being too conservative.

When presented with a surge of questions around payroll administration during the last workshop, Sars indicated that a dedicated function would be established to deal with queries around the amendment, but there is no sign of this as yet.

Unfortunately, the solutions for the expat in relation to this amendment are now becoming very limited. The expat exemption only relates to South Africans who are tax resident, so the obvious answer would be to cease tax residency of SA. However, doing this is not as simple as one might think. There are different options when doing this, but by far the cleanest and most direct approach, provided this is done correctly, would be to financially emigrate. Ceasing tax residency, however, comes with certain tax implications, which must be understood fully before one embarks on this path.

The road may be equally perilous for employers who will seemingly have to navigate these unchartered waters without much guidance from Sars. To get their ducks in a row before the amendment kicks in, employers will have no choice but to obtain a comprehensive understanding of their obligations.

• Du Toit and Leon are technical editors of a recently published book on the expatriate tax and what it means to both SA citizens working abroad and foreigners in SA.