National Treasury reconsiders its repeal of the exemption on foreign earned employment income

• South Africa

• Tax planning and consultancy - Briefings

23-10-2017

In the 2017 Draft Taxation Laws Amendment Bill (TLAB) National Treasury (Treasury) proposed that the foreign employment income exemption contained in section 10(1)(o)(ii) of the Income Tax Act, 1962 (the Act) be repealed on the basis that the current exemption creates opportunities for double non-taxation in cases where the foreign host country does not impose income tax on the employment income or taxes on employment income are imposed at a significantly reduced rate. The effect of the proposal is that with effect from 1 March 2019 foreign earned income would be subject to tax in South Africa, however in terms of the proposal the taxpayer will be entitled to claim a tax credit in South Africa in respect of any foreign tax paid in terms of section 6quat of the Act.

This proposal came as a surprise and as expected Treasury received a number of comments opposing the repeal of the foreign employment income exemption. On 14 September 2017 Treasury published a draft response document (Response Document) relating to comments submitted in response to the proposals contained in the TLAB, based on the report-back hearings made to the Standing Committee on Finance held in Parliament.

The Response Document contains, inter alia, the following comment relating to the repeal of the exemption of foreign employment income:

“Comment: The tax will have a severely negative impact on finances, and remittances to South Africa, especially for those on relatively lower incomes. This includes amounts remitted to family members to fund living costs in SA, investment of foreign income in some family run businesses and money spent in South Africa during visits.”

Treasury accepted this comment and now proposes to amend the Act to exempt only the first R1 million of foreign earned employment income, from being taxed as income in South Africa, provided that all the requirements of section 10(1)(o)(ii) of the Act are met, including, inter alia, that the employee must work outside of South Africa for more than 183 days, of which 60 continuous days must be during a 12 month period. Foreign employment income that exceeds the R1 million threshold will be subject to income tax in South Africa. In addition, Treasury has extended the effective date of this proposal to 1 March 2020 to give employees working abroad time to organise their tax affairs and to consider and/or adjust their employment contracts.

We welcome the proposal to exempt the first R1 million of foreign earned income from being taxed as income in South Africa as opposed to an outright repeal of the foreign income employment exemption.