If you start earning an income abroad, you may be surprised to learn that the South African Revenue Service (SARS) still expects you to pay taxes to them – even though you’re also paying taxes abroad.
We have a look at what it means to be “double taxed”, and we consider what you can do to help reduce this cost, and whether you can avoid it altogether.
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What does it mean to be double taxed?
According to Willem van der Merwe, fiduciary specialist at FNB Wealth and Investments, when you’re a South African taxpayer or tax resident, you are taxed on your worldwide assets and income.
“This means that irrespective of whether you work in South Africa or the United Kingdom, as an example, you need to report your earnings to the South African Revenue Service and pay the relevant tax according to the income tax tables,” says Van der Merwe.
At the same time, in this example, the UK tax authority can also levy tax on your income, as the work is done in their country.
“We refer to this as tax on a source basis. SA follows the same principle when foreigners work in SA. This is what is meant by ‘double taxed’,” says Van der Merwe.
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How can someone avoid or reduce double taxation?
Van der Merwe says that SARS allows taxpayers to apply for a rebate – subject to certain limitations – if foreign tax was already paid on income earned outside of SA. The taxpayer will be required to provide proof that tax has already been paid.
“Besides this, SA has also entered into specific tax agreements with many other countries, referred to as double tax agreements or tax treaties. The aim of these agreements is to avoid double taxation,” says Van der Merwe.
“Such agreements will provide that income of a particular nature may only be taxed in one of the two countries. Alternatively, it may be taxed in both countries with the residence state allowing for a credit for the foreign taxes imposed in the other country,” he explains.
“Certain agreements may also provide that an exemption is enjoyed for income earned in the other country.
“SA makes use of the credit system and an SA taxpayer will therefore be able to apply for a foreign tax credit with SARS, if there is such an agreement with the country where income was earned. This relief cannot be used in addition to the rebate mentioned above, it can be used as a substitution,” says Van der Merwe.
He points out that if a person decides to permanently leave SA, the person can declare themselves to SARS to no longer be a taxpayer in SA. They will then become non-resident for tax purposes.
“This means they will no longer need to declare their worldwide income in SA and will not be taxed on same. It’s important to consider all other implications of becoming a tax non-resident, such as the capital gains tax exit charge that will apply,” says Van der Merwe.
He highlights that it’s important to note that the above is simplified. Tax rules can be much more complex.
According to Danielle Luwes, tax manager at Hobbs Sinclair Incorporated, South Africans working or living abroad need to ensure they adhere to the relevant criteria, as new amendments to the Income Tax Act have been fully enacted.
"It's important to have an effective and well-thought-out tax strategy that ensures tax compliance for any given situation or individual, as there is no one-size-fits-all approach," says Luwes.
"Acquiring the services of a tax specialist who has your best interests at heart, understands your specific circumstances and can offer sound advice on what options are available to you, will go a long way to saving you having to pay unnecessary taxes on your expat income," she adds.
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