The South African Revenue Service (“SARS”) has made a point of forcefully pursuing compliance of South Africans earning a foreign-sourced income. Where non-compliant, SARS could issue audit requests, penalties and interest, or even initiate prosecution. Applying for tax relief under a DTA, is a sure way to remain compliant while minimising your exposure to taxation.
DTAs have a range of applications and can be fraught with technical aspects and requirements, which is why it is a niche area of expertise in cross-border taxation. Because it is a complex area of tax law, there are numerous misconceptions that find their way into social media and expat groups abroad.
Here are 5 common misconceptions to be mindful of:
A DTA offers permanent tax relief to expats
Where you previously qualified for relief under a DTA, it is important to confirm that you are still satisfying the requirements of the relevant DTA every year. For as long as you remain a tax resident of South Africa you must file tax returns every year, and as long as you file tax returns you must also submit a tax residency certificate to benefit from the relief under that DTA.
The DTA applies automatically
The fact that there is a DTA in place between South Africa and the country you find yourself in, does not mean you automatically trigger relief under that DTA. There are qualifying criteria that must first be assessed in what is the so called tie-breaker test. This test will guide you in ascertaining which of the two countries has the right to tax your earnings. The test considers whether you have a home of some kind of permanency in the country, where your “centre of vital interest” lie (such as your spouse, family and economic interests etc) and whether you have triggered tax residency in the host country. Once these factors can be proven to exist in your host country, you can then make an application to SARS to cease your tax residency in South Africa under a DTA.
I can’t obtain tax residency in a host country
The commencement of tax residency would be in accordance with the relevant laws set out in the host country, these laws vary from test such as, the number of days being physically present, to being liable for tax by way of investment, domicile or residence. The practical manner in which tax residency is evidenced to SARS for purposes of the DTA, is to obtain a Certificate of Tax Residence issued by the host country’s tax authority.
I can’t cease my tax residency in South Africa
If you wish to cease your residency by means of a DTA, you will need a Certificate of Tax Residence from the host country’s tax authority or a letter from the authority that indicates your status as a tax resident therein.
Where the tie-breaker test determines your factual circumstances and objective evidence to be in favour of the host country, the host country will have the exclusive right to tax your foreign income if non-residency has been claimed with SARS.
After qualifying for a DTA, I don’t have to pay tax on my SA income
This is a very dangerous misinterpretation of the relief provided for under a DTA. You must always pay tax on South African sourced income, whether rental income or returns on a South African investment. DTAs only provide tax relief for South African expats on foreign sourced income and assets. Irrespective of being a non-tax resident, an individual will always be liable to pay tax on where income is sourced within South Africa.
The snake in the grass
Expats are susceptible to erroneous advice. Whether because they are swept away by the trials of working in a foreign country or simply because they are too far away from home, they must be diligent when it comes to deciding which tax advice to listen to. Hearsay tips and suggestions on social media platforms do not address the uniqueness of a specific DTA or the circumstances of the individual.
If your tax consultant does not work through the relevant DTA with you, then that should be a major concern. If your tax advisor says that they will submit your returns and mark you as tax exempt, then that is an even bigger concern. If you are advised not to declare or show any proof of income to SARS, then you are in danger of committing tax fraud. These scenarios could lead to a SARS audit, where the questions will be directed at you – not your advisor.
