Double tax agreements explained for South African tax residents

If you’ve recently moved abroad for work or you’re planning to leave South Africa soon to start a new job overseas, tax is one of the important things you need to consider and plan for. Why? Because South Africa has a residency-based tax system, which means if you’re considered a resident for tax purposes, you’ll be expected to pay tax on your worldwide income back at home. This is where Double Tax Agreements (DTA) come into play to provide tax relief, so let’s take a look at how they work.

 

What is a double tax agreement?

South Africa has made a number of legal agreements with various tax authorities around the world to ensure that each country that is party to the agreement is clear on what taxing rights they hold against taxpayers.

 

How does a double tax agreement work in South Africa?

The point of a Double Tax Agreement is to ensure that if you are working abroad, you are not  unfairly taxed both in South Africa and the country in which you work. This means that a Double Tax Agreement that exists between South Africa and another country provides a legal defence to double taxation. The DTA specifies the requirements that must be met in order to determine where your obligation lies as a tax resident. 

Depending on where you are considered a tax resident (taking into account the Double Tax Agreement), this will decide where you’ll be expected to pay certain types of taxes on the income you earn. In order to correctly utilise this tax relief avenue on your foreign income, you will need to ascertain which country has the right to tax your income. How do you do this? It’s called the measured approach and it’s applied by means of the tie-breaker test which looks at various factors, including whether you hold a tax residency certificate, where your permanent home is located and where  your family and economic ties lie, to name a few.

 

Who does a double tax agreement apply to?

A Double Tax Agreement will become relevant to your situation where you are earning income both in South Africa and overseas, or if you are a tax resident of South Africa (without income from a South African source) and you earn an income from a foreign source. This type of situation can get complicated for tax purposes. Especially when you consider the fact that South African tax residents are subject to expat tax (which came into effect in March last year) on their worldwide income, with the first R1.25 million being tax exempt.

This makes it important for many South Africans (particularly in light of the changes regarding expat tax) to carefully consider what their tax obligations will be, taking into account the DTA between South Africa and the country they are now residing in. There is the possibility that you may need to pay expat tax on your foreign income in South Africa, in addition to tax in the country you’re earning in – which means you’ll want to use the applicable Double Tax Agreement as a tax relief option to prevent this from happening.

• Most countries want to collect income tax on both worldwide income derived by the residents of the country and on local income derived by non-residents in that country.
• The practical result of such a system is that income earned by a resident of one country from a source in another country lands up being charged tax twice, in both countries.
• Taking such a position on tax can hinder foreign investment, so countries that have trade relationships have entered into agreements that make it possible to avoid double taxation.
• These agreements stipulate that income of a particular nature will be taxed only in one of the two countries, or where it is taxed in both,  the country of residence may provide a credit for the tax imposed by the other country. 
• While certain agreements may allow for the income to be exempt in the residence country,  South Africa uses the credit method.

 

Can you get a rebate on foreign taxes paid?

If you’re taxable in SA on your foreign income and liable to pay tax in that foreign country on that same income, you will be given a credit for the foreign tax paid against your normal tax liability in South Africa. This means that the tax you’ve paid abroad will be used to offset your expat tax liability back home.

• To qualify for this credit, you must have paid the tax to the government of any country other than South Africa, and you must have done so without any right of recovery of tax paid.
• You will need to submit proof of foreign taxes paid, this can be in the form of a tax assessment, tax receipts or an official document that verifies  foreign tax paid.
• Where you are married in community of property, certain types of income will be seen as having accrued to both spouses in equal shares. Here, foreign tax credits relating to that income will be divided equally between spouses.
• Bear in mind that foreign tax credits will never be more than your tax payable on the total amount of foreign taxable income in South Africa during  a tax year.
• However, where there is an excess amount, it is possible that it can be used to offset your liability in the following tax year, but this excess cannot be rolled over for more than seven years from the tax year in which it was first carried forward. 
• Where you have paid foreign taxes paid on income not subject to tax in South Africa, you will forfeit these amounts. 

 

Which countries does South Africa have double tax agreements with?

Details of all Double Tax Agreements can be found on the South African Revenue Service website, and you can find a handy summary here. The specifics of all agreements are not the same, so it is worthwhile getting expert tax advice in this area.

 

In Africa, South Africa has double tax agreements with the following tax jurisdictions:

• Algeria
• ​Botswana
• ​Botswana
• ​Cameroon
• ​Democratic Republic of Congo
• ​Egypt
• ​Ethiopia
• ​Ghana
• ​Kenya
• ​Lesotho
• ​Malawi
• ​Mauritius
• ​Mozambique
• Namibia
• ​Nigeria
• ​Rwanda
• ​Seychelles
• ​Seychelles Protocol
• Sierra Leone
• ​Swaziland
• ​Tanzania
• ​Tunisia
• ​Uganda
• ​Zambia
• ​​Zimbabwe

 

South Africa has double tax agreements with the following tax authorities in other parts of the world:

• Australia
• ​Austria
• ​Belarus
• ​Belgium
• ​Brazil
• ​Bulgaria
• ​Canada
• ​Chile
• ​China (People’s Republic of)
• ​Croatia
• ​Cyprus
• ​Czech Republic
• ​Denmark
• ​Finland
• ​France
• ​Germany
• ​Greece
• ​Grenada
• ​Hong Kong
• ​Hungary
• ​India
• ​India
• ​Indonesia
• ​Iran
• ​Ireland
• ​Israel
• ​Italy
• ​Japan
• ​Korea
• ​Kuwait
• ​Luxembourg
• ​Malaysia
• ​Malaysia
• ​Malta
• ​Mexico
• ​​Netherlands
• ​New Zealand
• ​Norway
• ​Norway
• Oman
• ​Oman
• ​Pakistan
• ​Poland
• ​Portugal
• ​Qatar
• ​Romania
• ​Russian Federation
• ​Saudi Arabia
• ​​Singapore (Revised)
• ​Singapore
• ​Slovak Republic
• ​Spain
• ​Sweden
• ​Switzerland
• ​Taiwan
• ​Thailand
• ​Turkey
• ​Turkey
• ​Ukraine
• ​United Arab Emirates
• ​United Kingdom
• ​United States of America (USA)

 

Important things to note about double tax agreements and income tax in South Africa

Tax treaty relief must be applied for as a taxpayer, and SARS must approve such application.

• Just because there’s information on DTAs that’s only a quick Google search, please do not assume you can read and interpret the DTA correctly, decide that you qualify for tax relief and move on with your life.
• Not all DTAs are the same, and the use of the relief they provide is subject to mutual assistance and agreement procedures on both sides. For example, in order to utilise the DTA between SA and the United Kingdom, SARS will require a tax residency certificate before considering the DTA.
• Each agreement has stringent procedures in place that must be complied with, in order to correctly obtain tax relief. 

When working with a new or recent DTA you will need to be cautious when relying on the provisions of the DTA as both countries are still figuring out their way around each other.

 

FinGlobal: Expat tax experts for South African expats

We know that tax can get complicated. That’s why we’re here to make it easy. We’ll help you get your tax affairs straightened out, so you know exactly where you should be paying tax and why. We’ll also assist you with tax refunds, tax clearance and tax compliance, helping you get all your tax ducks in a row, clarifying your position on expat tax and the application of any relevant Double Tax Agreements in South Africa.

So what are you waiting for? Get in touch with FinGlobal today to discuss how we can reduce your expat tax worries and ensure you’re not being unfairly taxed.