Foreign employment income

2008-04-10 00:00

With effect from January 1, 2001 South Africa adopted the residence basis of taxation.

Prior to the effective date, the source basis of taxation was in force. It became apparent that the determination of the source of certain types of income became quite complex.

Essentially, the income either had its true source in South Africa or the income was deemed to be from a South African source. One had to ascertain the origin of the income source in order to determine whether South Africa had the right to tax the income.

The move to the residence basis of taxation simplified matters to a certain extent. The focus shifted from the source of the income to the residence of the individual.

Thus, if an individual is a resident of South Africa, his worldwide income will be subject to tax in South Africa. There may be a possibility of double taxation where the country of source also taxes the same income.

This obviously results in double taxation and if there is a double tax agreement between those two countries, this must be consulted to determine which country has the right to tax the income.

One of the sources of income that will apply to the majority of residents is employment income. In an effort to streamline the issues surrounding the taxing of foreign employment income, the SA Revenue Service (SARS) has circulated a draft interpretation note 16 (issue 2) (DIN).

The contents of the DIN revolve around the provisions of section 10(1) (o) (ii) of the Income Tax Act No 58 of 1962, as amended.

Section 10(1) (o) (ii) is one of the exemptions found in the act. It applies only to employment income and effectively exempts employment income subject to certain requirements. The pertinent points of this section are:

• The type of income envisaged must be employment income.

• The services must be rendered outside South Africa.

• The services are rendered for or on behalf of any employer.

• The section focuses on the employment income received or accrued in any year of assessment during any 12-month period.

• The individual must be outside South Africa for the prescribed number of days.

• The exemption does not apply to remuneration paid to employees of government, municipalities, certain national and provincial public entities and holders of public office.

The DIN indicates that weekends, public holidays, vacation and sick leave are considered to be part of the prescribed days outside South Africa. An important point to note is that the exemption does not apply to self-employed or independent contractors.

In the event of a query from SARS, taxpayers will be called upon to prove that they were outside South Africa for the prescribed period. SARS may then request proof in the form of secondment letters, employment contracts and copies of passports.

It must be borne in mind that section 10(1) (o) (ii) does not waive the liability of the employer to deduct employee’s tax in terms of the Fourth Schedule to the act.

If the employer is satisfied that the exemption provisions are met, he may elect not to deduct employee’s tax. However, should the employer fail to withhold employee’s tax and the exemption provisions do not apply, he will be liable for the employee’s tax together with interest and penalties.

Nolan Daniels

Tax Compliance Manager

083 776 2271

nolan.daniels@kpmg.co.za

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