EXPATRIATE TAX EXEMPTION

NATIONAL TREASURY FEEDBACK

Dear EPG Members: Kindly note that we have been asked by Barry Pretorius to give technical feedback which is factually accurate, but also non-technical, on the National Treasury Workshop. Where any member wants a more technical explanation around the items noted below, we have recorded the whole session which may be used to confirm accuracy of statements and we will also provide more detailed technical explanation on any item noted below, as requested by Members.

Background

The original proposed tax law amendment on South African expatriates working abroad in 2017 was announced in the 2016/17 Budget as indicating that it would only be applicable where an expatriate is not taxed in another country. This was perceived to be grossly unfair towards South Africa expatriates working abroad and they formed a petition (the expatriate petition group (hereinafter “the EPG”)). When the draft law was published, there was a large shift in policy where not only South African expatriates in low or no tax countries would be affected, but a complete removal of the expatriate tax exemption.

Executive Summary

The following main conclusions are noted –

  1. The National Treasury Workshop was not successful for the EPG, with the tax law change definitely proceeding and the especially unfair taxation of fringe benefits (housing, security, vehicles, flights, insurances, school fees etc.) being confirmed as applicable.
  2. The timing of this process was not ideal, but not something we can control. We note various economic reasons why we believe National Treasury may be so inflexible. There may also be political reasons, but these have not been clearly expressed to the best of our knowledge.
  3. There are very few tax practitioners or professional bodies supporting the cause of the EPG, despite expatriates being their clients.
  4. For the collective, the future options are limited. The most obvious being what has worked before being directly taking the matter to Parliament. This can only be done where there is sufficient support and grounds as well.
  5. For the individual expatriate, there is a clear indication that stronger enforcement will be forthcoming, including more detailed SARS tax return questions, audits and generally tougher questions being asked by SARS. This will come with the necessary penalties and prosecution, as the Standing Committee on Finance – Parliament of South Africa has made it clear that it wants to see “people in jail” for tax evasion. Each member must therefore please take responsibility and it is no longer the time to adopt a wait-and-see approach on compliance.

Our Previous Strategy and “The Win”

Once the initial law change was announced, there were various strategies adopted by several stakeholders, including submissions from SAICA and SAIT to National Treasury and a “Big 4” meeting with National Treasury, where tax specialists from certain banks were also in attendance. Naught came of these actions, as we expected.
We know from a policy perspective, the way to take this on would be to make Parliamentary submissions on the draft law and physically present these submissions to Parliament, as we then duly executed and the EPG can be solely credited for the R1m exemption now exacted in the tax rules, winning the proposed deletion of the South African expatriate exemption.

This saved many thousands of current and future generations of South Africans millions in future taxes, including allowing future generations to work abroad without permanently breaking ties with South Africa, as well as allowing current expatriates to come and retire in South Africa.

Problem with existing law change

Whilst grateful for the R1m concession, the EPG through members believe that the existing law still has the following critical shortcomings –
  1. Fringe benefits and Allowances would be fully taxable under current law, quickly “eating-up” the R1m exemption. This refers to, for example, not real “earnings” but more items necessitated by expatriate life, such as housing, car rental and transport costs, foreign pensions, security costs, drivers, insurances and home leave trips. Without providing a comprehensive list, these items would all be taxable income under South African law, often not taxed in the expatriate country, thus the R1m would be used up against not true earnings.
  2. The R1m is problematic from a planning perspective taken volatility of the Rand against major currencies.
  3. The R1m must be given an inflationary adjustment each year, as otherwise the relief will be slowly eroded as is happening with other tax reliefs in South African tax law (consider the R350,000 pension cap and R500,000 retirement / retrenchment benefits not changed for many years).

Continuous Engagement

We have made 3 (three) submissions to National Treasury hereon, including in the 2017 and 2018 legislative cycles, the last one resulting in a National Treasury action point on 06th December 2018, where this item was flagged for a separate Expatriate Exemption Workshop, to be held on the 6th of March 2019.

Expatriate Exemption Workshop – Attendees

There were some 72 (seventy-two) odd registered attendees and we took a photo of the register of attendance. This includes SARS officials, tax advisors, as well as various large South African employers.

Tax Consulting SA had 4 (four) representatives being Jerry Botha, Jonty Leon (admitted attorney specializing in Financial Emigration, Jean Du Toit (admitted attorney specializing in international tax law and double tax agreement tax relief) and Tenielle Panther (admitted attorney specializing in employment law and tax law around employee remuneration structuring).

As we know, the question may be asked by some members, and prudently so, we believed that each attendee was required to cover separate areas of law, depending on direction of discussion. We have not charged the EPG for any services to date including the NPO, for our submissions or attendances to date.

National Treasury Made Quick Work on “No Law Change”

Right off the bat, National Treasury made clear that there would be no reconsideration of the law, the law is fully enacted to take effect 01 March 2020 and that there is no policy decision to extend the relief on the concerns we raised in submissions. They indicated that all our submissions were received and “considered”. There was also reference to their “political bosses” and that National Treasury’s policy hereon has been established.

Decoding this speak, whilst National Treasury would in all probability deny and state that it remains open to submissions and consultation, our reading is that the law as it stands will come into effect and no changes will be made regardless of the strength of our submissions.

Whilst there may be “consultation” in form, there is no “consultation” in substance where we are not given written responses to each of the items we formally submitted to National Treasury. None of the items raised were also discussed in detail during the Workshop.

Who Were the Voices in the Room?

This is where our recording comes in handy and there were broadly the following categories –
  1.  South African ExpatriateTax Petition Group: We were the only party who expressly stated that the law change in current format is not equitable and requires refinement. Our view is still that this is bad for South Africa and the current, as well as future expatriate community. No other attendees made a statement against our views, for example, no one suggested that the concerns we raised can be overcome with tax planning or that it is morally unfair to ask for expatriates to be treated differently.
  2. Partial Voices of Support for Expatriate Law Change: These were comments from the floor asking for partial relief, specifically KPMG’s Beatrice Gouws who expressly gave partial support for our concerns, PWC’s Kyle Mandy (previously supported the EPG’s cause in National Treasury sessions) who noted the tax relief for foreigners working in South Africa on employer provided housing and suggested the same be extended to South Africa (we must caveat this is only R25,000 for the first two years so hardly suitable benchmark taken the accommodation costs for expatriates and this also excludes accommodation allowances); Eskom who asked for SOE’s being given same tax relief; we think, as they did not identify themselves, EY who asked whether only low and no tax countries’ expatriates would be taxed under this law (a view we immediately and strongly opposed as even no income tax countries pay taxes, just not income taxes and all expatriates should be treated equitably). There was no other presentation in the room asking for tax relief or for a more equitable treatment, thus one knows one’s enemies.
  3. Administrative Concerns: These concerns relate to how the foreign benefits should be disclosed on IRP5 certificates or reported to SARS, claiming of foreign tax credits where tax certificates are not available, how the relief and tax credits should be computed, share scheme tax, tax return format changes etc. We will not delve into these as these are practical concerns and which we believe, as we stated in the workshop, are self-created complexities.The EPG has always supported taxpayers being fully compliant with SARS, so we do not disagree with certain of these administrative concerns being raised. However, we are less impressed that the largest group of providers of South African expatriates felt either not the need, or perhaps had not the moral courage, to mention their disagreement with the tax law change. What is certain from their items raised is that tax compliance design in South Africa (which includes tax return questions and IRP5 certificate disclosures) must be extended to be more focused on expatriates.We have noted, before the Parliamentary 2017 comment by SARS that the lack of compliance by expatriates is the main reason for the law change. Sadly, we see on a daily basis this being true, albeit perhaps totally unintentional. Expatriates must therefore prepare themselves proactively for more stringent tax return questions, SARS verifications and SARS audits.
  4. Just to Say We Were There: Some comments were raised which did not make sense to National Treasury / SARS and Attendees. We had a sense that some attendees just attended to say they attended and commented just to claim they participated. One example is where an item was raised completely outside the scope of the parameters of workshop which National Treasury and SARS commented. Nothing more needs to be said on these, other than they did not support, let alone fight the expatriate cause.

Why is National Treasury so Inflexible?

This is a good question and one to which we do not have an answer. The reasons for this are also not important, as even understanding the reasons, does not further our cause which we know has merits. National Treasury has not responded to our submissions and neither did any of the attendees give any explanation why they did not support a better dispensation for expatriates.

We believe, where the below items are viewed holistically, the picture is clear that South Africa is in fiscal trouble and far more painful decisions were required by National Treasury than dealing with exemptions for expatriates.

A Bad Spot in Election Year

For the first time in an election year was there no tax relief given to taxpayers. Regardless of the tax bracket, each South African taxpayer was only given R153 per year tax relief for the year (R12,75 per month) and there was no tax relief given whatsoever on bands, rates, medical credits, travel allowances, retirement and pension withdrawal rates. There can be no doubt that National Treasury and its political bosses would have given much more tax relief in an election year, especially for lower earners, if they could.

Who is paying taxes in South Africa?

Very close to half of registered taxpayers in South Africa (6,369,806) pay no taxes and members will note that the higher contributors to taxes are very small, with these being no strong middle class of taxpayers. The top taxpayers only make up 120,751 and with the new expatriate law coming into effect, and fringe benefits included, they will most certainly increase this percentage. The statistics speak for itself –
They are searching far and wide for more taxable items
The following “new” tax proposals were made in the Budget 2019/20 indicating the search to find more taxes –
  • Gambling Tax: They have dusted off a 2012 gambling tax proposal for 1% and to be re-looked at in 2019.
  • Electronic Cigarettes and Tobacco Heating Products will be taxed.
  • Duty Free Shops will be revisited on their tax exemption.
  • Environmental Tax will include tax on straws, caps, beverage cups, air pollution, efficient water use and recycling.

Enforcement

The following announcement was made in the Budget 2019/20 –
This bluntly states that over the short to medium term –
  • Government will increase tax collections.
  • That Government believes the best change for collection is through more effective SARS enforcement.

Conclusion

We are very disappointed with this outcome, but clearly the timing was not correct to ask National Treasury for relief. The EPG must take note of its previous successful strategy which yielded results, being a petition and mandate to take-up in Parliament. Members must take collective responsibility to grow the NPO and get signatories as the strength is in numbers and supporting voices – something we did not have in the National Treasury session. Individually, expatriates must make sure they are past and future fully tax compliant, and well planned for the future to the extent possible.

Jerry Botha
Managing Partner at Tax Consulting South Africa

For more information and to support our cause please visit www.taxpetitiongroup.co.za

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