In December 2017 South Africa amended its legislation relating to the exemption of foreign employment income, and effective 1 March 2020, this exemption will be capped at R1m, explains Zohra de Villiers, tax partner in the Cape Town office of KPMG.
"Over the past few years we have seen a steady increase in the number of South African outbound expatriate employees," she says.
"Some of them want to gain experience working in a different country and others want to take advantage of potentially earning tax-free salaries in certain jurisdictions."
Since the introduction of VAT in the Middle East in January 2018, tax professionals from South Africa have also taken up employment in this region.
Currently, if a South African tax resident works offshore and is physically present outside South Africa for more than 183 days - of which more than 60 days are consecutive during a 12 month period - the salary earned for the work performed offshore during this period is exempt from tax in South Africa.
This can be attractive to offshore workers if they are in a country that does not levy personal income tax.
The amendment, effective 1 March 2020, will, therefore, have a significant impact on the tax liability of South African residents working abroad and in particular in jurisdictions with no personal income tax or a lower tax rate than South Africa.
Currently, those working in the Middle East earn their salary tax free. Therefore, if a South African resident works in Dubai and earns R3m a year, there is no tax liability in South Africa, on the basis that they are physically absent from South Africa for the required days.
Once the amendment comes into effect, the South African resident will, for example, have a tax liability of R742 974 on taxable income of R2m as only the first R1m will be exempt.
Resident versus non-resident
This amendment impacts South African tax residents working abroad. If an individual has broken South African tax residency, the amendment will not impact the individual's South African tax liability.
Where a South African tax resident also becomes tax resident in the jurisdiction where he or she is working due to that country's domestic legislation, the double tax agreement between South Africa and the host country should be reviewed to determine in which country the individual would be, exclusively, a tax resident.
Should the individual break South African tax residency due to the application of tie-breaker clauses in the double tax agreement, he or she may be liable for exit taxes in South Africa.
Further, there may still be a requirement to file a South African tax return if the individual earns rental and/or investment income in South Africa.
As the amendment may result in taxes payable in South Africa and in the country the individual is working, on the same remuneration, a tax credit may be claimed in South Africa in respect of the foreign taxes paid.
This is, however, limited to the taxes the person would have paid in South Africa.
Further, as one is required to have documentary proof of taxes paid offshore, the credit may only be claimed when filing the tax return - if the documentary proof is available.
This could result in the refund being paid a year or even longer after the relevant tax year.
South African tax residents working abroad are, therefore, encouraged to review their specific circumstances and consult their professional tax advisor to ensure that they are well aware of the impact, if any, the amendment will have on their South African tax liability and compliance.