South African expatriates who work and live abroad are cautioned to ensure their tax affairs are up to date, to avoid falling foul of SARS’ drive for full tax compliance. This is especially the case now that SARS has drastically turned its wheel to ensure the collection of all taxes due and payable.
Delano Abdoll
Legal Manager: Cross-Border Taxation at Tax Consulting SA
Micaela Paschini
Tax Attorney at Tax Consulting SA
Those who leave these shores should be particularly wary of merely assuming that they are in SARS’ rear-view mirror if they have simply moved to a country that has a Double Taxation Agreement (DTA) with South Africa (SA).
There should be no confusion amongst expat circles abroad, that South African tax residents shall be taxed by SARS on their worldwide income. This is irrespective of their global whereabouts and whether they believe they are under SARS’ radar or not.
Further, it remains imperative that simply moving abroad does not automatically protect your foreign income under a DTA. To avoid being taxed by both SARS and the foreign country’s revenue authority whilst living and working abroad, a formal process to cease your tax residency is required.
SA has entered into a DTA with 82 countries around the world – making a DTA the obvious route for expats who wish to protect their foreign income, but still have the desire to return to SA permanently.
However, only when a DTA is correctly applied, will an expat be considered a non-resident in SA for tax purposes. This will result in SARS being prohibited from taxing their worldwide income sourced outside of SA.
Merely presuming a non-residency status does not excuse the fact that a formal process with SARS has not been undertaken. Again, this process, in the context of updating one’s tax residency status under a DTA, does not apply automatically.
It goes without saying that the DTA process must be undertaken on an annual basis, where an expat wishes to retain their tax non-residency status. Failure to do so annually will result in an expat reverting to being a South African tax resident and being taxed accordingly. The annual process involves obtaining a foreign tax residency certificate each year and providing this to SARS, with a declaration of non-residency.
What is colloquially referred to as the DTA “tiebreaker” test, will be applied yearly to determine which country holds the taxing right in respect of an expat.
SARS will scrutinise whether an expat is, in fact, a non-resident in each and every case – even where a DTA between SA and a foreign country is in place. One of the reasons behind this is that each time an expat formally becomes a non-resident in SA, SARS loses its right to tax that expat’s worldwide income. As such, SARS’ stringent verification process should not be underestimated.
This is especially the case if one considers that SARS’ implementation of the “Approval of International Transfer” (AIT) Tax Compliance Status process applies to all cross-border transfers of capital for tax non-residents, regardless of the amount involved.
As a result, South African expats who are formally tax residents in SA but have assumed that a DTA applies automatically for purposes of making them tax non-residents, may be circumventing SARS approval before funds can be remitted out of the country.
To elaborate on this aspect, expats should be mindful that a successful AIT application will require the submission of a range of key supporting documents, which may be difficult to source. As an example, where the funds are from an inheritance, the following supporting documents will be required
It is thus evident that SARS has implemented this enhanced form of tax compliance, to drive its collection and cast a close eye on those who transfer funds out of the South African tax base.
On a final point, expats should avoid assuming that they are “too small a fish for SARS to fry”. Since SARS is on a major compliance drive with its modernisation programme, it has put a range of mechanisms in place to ensure that they are paid their dues, especially where a South African taxpayer has relocated abroad.
Further to that, the automatic exchange of information laws obliges financial institutions to collect certain customer information and report collections to revenue authorities across the world. The governing laws are the US Foreign Account Tax Compliance Act and the OECD Common Reporting Standard.
Expats are cautioned to ensure that all their affairs are in order with SARS, to steer clear of a tax non-compliance status. With SARS casting a close eye on expats, it remains crucial that those living abroad correctly cease their tax residency in SA.
As the process of ceasing your tax residency is complex, expats are encouraged to seek the assistance of cross-border and DTA specialists, as they are well-equipped to manage the entire process.
DTA FAQs: Answering All Your Questions