With the Covid-19 pandemic largely in the rear-view mirror, tens of thousands of South Africans are seizing lucrative employment opportunities abroad. At the same time, many of these expatriates are unaware that their hard-earned income is at risk of being taxed twice. On the one hand, by the South African Revenue Service (SARS) as part of their worldwide income; and on the other hand, by the foreign revenue authority as income sourced within the borders of an expatriate’s host country.   

The good news is that Double Taxation Agreements (DTAs) are here to help! Where a DTA is available between South Africa and an expatriate’s host country, the result of double taxation by both SARS and the foreign revenue authority may be stopped in its tracks. 

Unfortunately, misinformation regarding DTAs is still being shared throughout expatriate social communities abroad. For this reason, the following common misconceptions about how DTAs work need to be dispelled. 

1. Income Earned Abroad and Tax Residency 

Many expatriates believe that SARS cannot tax their foreign income earned whilst living and working abroad. These expatriates claim that since their income is earned from a source outside South Africa, SARS has no right to tax their income earned abroad. 

This belief is incorrect. South African expatriates must understand that South Africa’s tax system is residence-based. Simply put, South African tax residents will be taxed by SARS on their worldwide income. In stark contrast, South African tax non-residents will only be taxed on income derived from a source within the borders of South Africa. 

By correctly applying the available DTA, expatriates may undertake the formal process with SARS to update their status in South Africa as being tax non-residents. The benefit of doing so, is that their foreign income will instead be rendered as non-taxable in South Africa. 

2.  A DTA Enforces Double Taxation

Some expatriates are also of the opinion that SARS will use a DTA with their foreign host country to ensure that they are double taxed, both in South Africa and abroad. 

However, the complete opposite is true as the purpose of a typical DTA is to prevent an expatriate’s income from being taxed twice. This is apparent from the title of a DTA, which includes the reference ‘for the avoidance of double taxation’. 

3. DTAs Apply Automatically 

Another common misconception amongst expatriates is that a DTA will apply automatically to protect their foreign income from being taxed by SARS. This is a grave mistake, for several reasons. 

Firstly, an expatriate can only claim relief from double taxation if a DTA is available between South Africa and their chosen foreign host country. For example, South Africa currently has DTAs in place with eighty-two countries around the world, including Australia, Belgium, Canada, Nigeria, Saudi Arabia and the United Kingdom.

Secondly, only expatriates who qualify can claim relief in terms of the relevant DTA. To determine if an expatriate qualifies, SARS will investigate whether he or she has the intention to remain abroad permanently or not. Further, the expatriate will have to fulfil the requirements of the so-called ‘tie-breaker test’ provisions of the relevant DTA. Satisfying these provisions will enable an expatriate to allocate the taxing rights of their foreign income exclusively to their host country, rather than South Africa.

Thirdly, expatriates are required to undergo a formal process by applying to SARS to change their status in South Africa from tax resident to tax non-resident. This change does not occur automatically. In fact, only upon successful completion of its verification process, will SARS issue an expatriate with a Notice of Non-Resident Tax Status letter, to confirm their tax non-residency in South Africa.

4.  How Will SARS Know? 

Most South African expatriates are of the belief that it is impossible for SARS to find out about their income earned while living and working in foreign host countries. Some expatriates have even stopped filing tax returns in South Africa on account of them being abroad. 

This erroneous view stems from a mistaken belief that SARS will not discover their foreign income. Reality dictates otherwise, as SARS actively collects and shares information with foreign banks and revenue authorities through the Common Reporting Standards (CRS) initiative. 

To put it as it is, many expatriates have been caught out and audited by SARS after information was received through the CRS. The legal consequences being inclusive of punitive penalties, interest and even criminal prosecution. In view of this, expatriates should play open cards with SARS by continuing to file their tax returns to fully declare their foreign sourced income. This income may then be protected from double taxation through the application of the available DTA.

5.  Foreign Tax Residency Certificate: Guaranteed Protection  

Some tax advisors advise South Africans that double taxation will be kept at bay, by simply obtaining a tax residency certificate (TRC) from their foreign host country’s revenue authority. 

While a TRC is a crucial document required by SARS as part of the formal DTA application process, this is only one piece of the puzzle. Expatriates will also need to provide SARS with several key documents and a written motivation, preferably in the form of a legal opinion, to provide sufficient proof that they do qualify for a temporary tax non-resident status. Collectively, all of these documents will paint a complete picture of an expatriate’s factual background in support of their DTA application. 

With the help of experienced tax attorneys, South African expatriates have navigated the technical pitfalls to successfully claim DTA tax relief and protect their income. 

Written by Delano Abdoll, Legal Manager: Cross-Border Taxation and Richan Schwellnus, Tax Associate at Tax Consulting South Africa