Before 2020, South African tax residents could claim total exemption on their worldwide income, provided that they met the necessary legislative requirements. Today, South African tax residents can only claim tax exemption on the first R1.25 million earned abroad, which means that they are now expected to pay tax back home on income earned abroad. To protect your foreign employment income from overzealous taxation in the hands of two tax authorities, Double Tax Agreements offer global workers a measure of relief. Let’s take a look at some important things you need to know about Double Tax Agreements and how they work.
Double Tax Agreements
A Double Tax Agreement is meant to prevent the same amount being taxed twice
A DTA is an agreement between two countries that income earned by an individual or company resident in one country should not be taxed entirely by both countries, but that tax paid by the resident in the host country should be offset against the tax liability in the resident country. Double Tax Agreements are becoming increasingly necessary in a globalised economy in which the number of multinational corporations and expatriates is constantly booming. There are different agreements that apply to individuals and business entities, and these can vary significantly from country to country. It is this disparity that makes it important to seek trustworthy, objective advice on your tax position if you are working in another country and you’re earning more than R1.25 million per annum.
A Double Tax Agreement, if used correctly, can override your status as tax resident in SA
DTAs lay down the rules by which dual claims to tax must be resolved, providing an avenue for appeal to relevant authorities should the taxpayer feel there has been a contravention of the terms of the tax treaty.
It’s important to take note of how a DTA works to provide relief. Most people think that where there is a DTA between South Africa and the host country, the income earned in the host country is not taxable back home because the DTA assigns sole taxing right to the host country. This is not correct.
- When it comes to employment income, most DTAs actually assign sole taxing right to the country of residence unless the employment is exercised in a host country, in which case both countries will have a right to tax the income in question, except for a number of exclusions. The result is that, as a South African tax resident, your income remains subject to tax in South Africa.
- Where the DTA contains a residency article, this may override the provisions of the Income Tax Act if applied correctly, which means that a person may be regarded as non-resident by virtue of the DTA for that particular tax period, even if they meet residency tests under our domestic tax law.
A Double Taxation Agreement provides a defense to double taxation
It sets out various requirements that you must meet in order to clarify where you fall as a tax resident.
- Depending on where you fall as a tax resident, the DTA will determine where to pay taxes on income received.
- To correctly apply treaty relief on your foreign income, you will need to clarify which country has the right to tax your income. This is achieved through a measured approach, known as the tie-breaker test, which weighs up a number of factors, such as a tax residency certificate, the location of your permanent home, as well as details relating to your personal comings-and-goings.
You will need to get approval from the South African Revenue Service to use a DTA for tax relief
Double tax treaties provide that income of a particular nature will be taxed only in one of the two countries or may be taxed in both countries, with the country of residence granting a credit for the tax imposed by the host country.
While certain agreements may provide that the residence country may exempt the income, South Africa uses the credit method. Accordingly, relief under a DTA must be sought through application, and SARS is strict on checking every aspect of your assertion that you qualify. What this means is that DTA relief does not work in your favour automatically just because a DTA exists between the two countries. You must file your tax return in order to claim the applicable relief.
You can claim a rebate for foreign taxes paid in terms of a DTA
Where a DTA does not assign sole taxing right to your host country by virtue of a residency article, you will be allowed a credit on your foreign tax paid against your tax liability in South Africa. To qualify for this credit, the tax must have been paid or payable to the government of any country other than South Africa, without any right of recovery.
It will be necessary to submit proof of foreign taxes paid or payable, such as a tax assessment documentation or tax receipts will usually be accepted as proof of foreign tax paid or payable.
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