“The hardest thing in the world to understand is the income tax.” (Albert Einstein)
With an increasing amount of business being conducted online, it’s perfectly possible to live in one country and earn an income in another. If you are conducting services for global corporations and earning foreign income in another country, you could get caught up in a world of tricky tax situations. Under these circumstances, you can find yourself being taxed twice, both in the country where the business is conducted and here at home in Mzansi.
To prevent this scenario and encourage South African residents to bring valuable foreign income into the country, the government has enacted Double Taxation Agreements (DTAs) with 79 foreign powers. If applied correctly at tax time, a DTA should mean you don’t pay tax twice. But how does this work, and just where are the pitfalls?
Check your residency status
Many people incorrectly believe that DTAs mean that income earned in a foreign country is taxable in that country. While the exact terms of each DTA are different, most DTAs actually give taxing rights on employment income to the residential country, unless the services are rendered elsewhere. This means that if you live in South Africa, you should pay all of your taxes in South Africa. On this basis, any taxes also paid to the government of the country in which the income was earned might qualify you for tax relief in South Africa.
Surprisingly though, in some cases, and depending on the domestic legislation in the particular country, an individual may find themselves tax resident in both South African and the other country, regardless of where you live. This can have enormous implications on your legal obligations and the taxes you end up paying. Luckily, all DTAs cater for such instances, with a set of rules to apply to determine which of the two countries you will ultimately be deemed tax resident in.
That’s why it’s vital to ask your accountant to first examine the laws and determine just where you are officially resident and how the specific DTA applies in your case.
Do you need a tie-breaker?
Some South African residents working in foreign countries should normally be given tax residency certificates by the country where they make their income. But don’t fall into the trap of assuming this means you’re not a South African tax resident. More likely you now have dual residency for tax purposes and will be required to apply a tie-breaker test under the specific terms of the relevant DTA to determine just where and how you need to pay taxes.
For something that was supposed to make things simpler and decrease the tax burden on residents earning money overseas, DTAs can actually be somewhat onerous.
Does the DTA even apply?
The fact that there’s a DTA between South Africa and the country of your income may fool you into thinking you’re automatically exempt from paying taxes in one of the two countries, but this is not so. DTA relief is something that must be proven in South Africa before it can be granted. SARS will want proof of your claims – only once they have satisfied themselves that the income is earned offshore will the DTA exemptions apply.
The bad news is that if you do not have the relevant supporting documentation, SARS may choose to view the omission as a material non-disclosure. The good news is that your accountant can help you assess what documentation you need.
If you’re earning foreign income but living in South Africa, please speak to us. We can help you to avoid paying more tax than necessary. Or, worse still, falling foul of the law.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
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