South African expatriates living in Guernsey, Jersey or the Isle of Man are under grave threat from the South African Revenue Service (SARS).

This is according to Thomas Lobban, Legal Manager, Cross-Border Taxation at Tax Consulting South Africa, who recently presented sold-out seminars on each of the isles to build awareness of this danger.

"None of these jurisdictions have a tax treaty with South Africa, meaning expats who have not formally ceased their tax residency with SARS are legally obligated to declare and pay tax on their worldwide income," he says.

The net is closing

Over the last five years, SARS has enjoyed major upgrades to its capability to detect, trace and prosecute non-compliant taxpayers abroad. This has been boosted by the global trend of information sharing and enforcement support between tax authorities, including those on the three isles. 

"Make no mistake, SARS knows you exist and where you are, and may already be building a case against you with input from your local tax authority," says Lobban.

Those living on the isles are particularly vulnerable because, without a double tax agreement (DTA) to defend their foreign income, they could soon find themselves paying both local tax and outstanding South African tax.

"It is time for expats to pull their heads out of the proverbial sand and urgently pursue financial emigration with the aid of a specialist expatriate tax consultancy, because the threat is imminent, and it is not a good strategy to treat oneself as a guinea pig from a SARS perspective," warns Lobban.

Expatriates who have already financially emigrated have nothing to worry about. But what is financial emigration?

Financial emigration

Every South African tax resident is required by law to pay tax on their worldwide income, regardless of where they reside on the planet. Unless they can objectively prove to SARS their intention to remain outside the country permanently, it will continue to treat them as resident taxpayers.

Unfortunately, many expatriates mistakenly believe that because they are no longer physically in the country, this releases them from their tax obligations. "SARS doesn't assume a taxpayer will never return just because they emigrated," says Lobban. "They must follow a formal cessation of tax residency process and provide objective evidence of the permanence of their departure, which is not assumed. This must be put to SARS."

There are three methods to cease South African tax residency:

1.      A double tax agreement, which does not exist between South Africa and the isles;

2.      The physical presence test, generally reserved for foreign nationals who were already only temporarily tax resident in South Africa (i.e., not applicable to South African nationals generally); or

3.      Financial emigration, a formal evidence-based process to change a taxpayer’s residency status.

Only the last option is available to expatriates based in Guernsey, Jersey or the Isle of Man. "If you have not completed this process, you are most likely still a tax resident on SARS’ system," says Lobban.

The risk of being caught

Expatriates who follow the financial emigration process, and succeed in their application, can rest assured that their foreign earnings are protected from SARS. However, if they have sources of income in South Africa, they will still need to declare them and pay tax accordingly.

However, anyone who did not financially emigrate may find themselves in a precarious position. While on the isles, if they accumulated wealth or have one or more sources of income, and have not declared or paid tax on them to SARS, they may have built up a substantial tax debt over the years.

"Unfortunately, those who evade tax will soon be caught and prosecuted," says Lobban, noting a major increase in the recent number of offshore audits. Such audits are particularly invasive and understandably distressing to taxpayers, delving deeply into the target's private affairs. 

“Once SARS has notified you of an audit into your financial interests, it is too late to even attempt to use the Voluntary Disclosure Programme for amnesty, as this is no longer seen as a voluntary step,” says Lobban. “Expatriate taxpayers who thought they were in the clear are now either being notified of audit, or, in other cases, are being automatically assessed by SARS based on incorrect information, which places them even more at risk down the line.”

In addition, SARS will deny any attempt to financially emigrate until a taxpayer is compliant and their account is settled. If not correctly handled, this could take years, during which time they must continue to declare and pay tax on their foreign income, potentially sacrificing even more of their wealth.

"Don't lose your first-mover advantage, because once SARS acts, there is no going back and any offer of leniency is off the table," warns Lobban.

Dedicated webinar for South Africans on the isles

Lobban says that during his visits, expatriate taxpayers and wealth managers attending his seminars on the isles were unsettled by the severity of the problem and keen for more information.

Tax Consulting South Africa will therefore be hosting a webinar on cessation of tax residency through financial emigration and tax risks specifically for South Africans and their advisors in Guernsey, Jersey and the Isle of Man.

The event will take place during August 2022. Interested parties can find more information and register their attendance by contacting Dr Dylan Price at dylan@taxconsulting.co.za or visiting www.taxconsulting.co.za/upcoming-events.