While there is a saying that the best things in life come in twos, this does not apply to tax. Particularly double taxation. No one wants to pay tax even once, let alone a second time. So, to avoid falling into any scenario where you have to pay tax twice, let’s take a look at the facts about double taxation, and how to avoid it where possible.
How many types of double tax are there?
Double taxation can be divided into two major categories.
- Jurisdictional double taxation occurs when the same income is taxed by two different jurisdictions. For example, a company might be taxed on its profits in the country where it is incorporated and also taxed on its profits in the country where it does business.
- Economic double taxation occurs when the same income is taxed twice at the individual level. For example, a person might be taxed on their income from their job in their earning country and then taxed again on this income in the country where they are tax resident.
How to avoid double taxation
While one possible solution to double taxation is to go off-grid entirely and move to a remote island where there is no commerce and therefore no tax, this is not a practical solution for most people.
Double taxation in South Africa can be avoided through the following means:
- Double Taxation Agreements (DTAs): South Africa has entered into agreements with several other countries to avoid or mitigate double taxation. These agreements set out the rules on which country has the right to tax different types of income.
- Foreign Tax Credits: If you pay taxes in a foreign country on income that is also taxed in South Africa, you may be eligible for a foreign tax credit. This credit reduces your South African tax liability by the amount of tax paid in the foreign country. This is known as tax relief.
- Exemptions: Some types of income are exempt from tax in South Africa, such as the first R1.25 million in foreign employment income earned abroad.
- Ceasing tax residency: If you permanently emigrate from South Africa, you may be able to avoid being taxed twice on your foreign-sourced income, provided you follow the official procedure of tax emigration through the South African Revenue Service to have yourself noted as a non-resident for tax purposes.
Double Taxation Agreements in South Africa: the basics
A Double Taxation Agreement (DTA) is an agreement between two countries that aims to avoid double taxation of income and assets. DTAs typically provide for one of two methods of avoiding double taxation: exemption or credit.
Double tax avoidance – Exemption
Under the exemption method, a taxpayer is only taxed in the country where the income or asset is sourced. This means that the taxpayer is not taxed on the income or asset in their country of tax residence.
Double tax avoidance – Credit
Under a credit method, a taxpayer is taxed in both countries, but the amount of tax paid in the other country is credited against the tax liability in the first country. This is to ensure that the taxpayer is not taxed unfairly on the same income or asset twice. South Africa has DTAs with more than 60 countries across the globe. These DTAs help to ensure that South African taxpayers are not double-taxed on their income and assets.
Here are some of the benefits of the double tax treaties with South Africa:
- They can help to reduce the amount of tax that you pay.
- They can make it easier to do business in other countries.
- They can help to protect your assets from being seized by foreign governments.
If you are a South African taxpayer who has income or assets in another country, you should check to see if there is a DTA between South Africa and that country. If there is a DTA, you may be able to claim a tax credit or exemption on your South African taxes. It is important to note that the specific rules and regulations governing DTAs can vary from country to country. Even the interpretation of the different DTAs can vary, so it’s important to get advice from a reliable cross border tax practitioner so as to avoid any nasty surprises that could affect your cross border tax compliance and tax liability.
- Protect your foreign income from SARS with these two documents
- How to get a certificate of residence to avoid double taxation in South Africa
- Top misconceptions about double taxation agreements in South Africa
FinGlobal: tax specialists for South Africans abroad
Double taxation shouldn’t mean double stress. To find out how you can effectively avoid double taxation and minimise your tax obligations, it’s worthwhile calling in the professionals. We can help you with expat tax compliance, tax clearance, tax refunds and tax emigration when the time is right.
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