If you live overseas, earn income from South Africa, or reside locally while receiving funds from abroad, navigating taxation can be incredibly complex. William Louw, a tax specialist at Sable International, shared with BizNews that the South African Revenue Service (SARS) is changing its approach—now requiring submissions of returns that were previously unnecessary, as well as requiring historical returns. This has led to some South Africans facing double taxation, despite existing Double Tax Agreements (DTA) in their countries of residence. Louw noted that this issue isn’t limited to South Africa; globally, tax authorities are scrutinising whether tax credits are permissible under these agreements. He also said that SARS is closely examining the residency presence test, and potential changes might be on the horizon. An intriguing dilemma has arisen according to Louw for those contemplating a return to South Africa: currently, SARS lacks a clear mechanism for South Africans to reclaim their tax status.
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Highlights from the interview
In an interview with Linda van Tilburg, William Louw, Director of South African Tax at Sable International, addresses the complexities of tax compliance for South Africans living abroad. Louw explains that SARS (South African Revenue Service) has been increasingly requesting tax returns in past years, often applying a scattershot approach. This poses challenges for taxpayers who may lack the necessary historical documents, as SARS requires proof, particularly those who have left the country. Double taxation concerns also arise, especially when foreign countries, like the UK, refuse tax credits, leading to potential double taxation with effective rates as high as 80%.
Louw stresses the importance of tax immigration and ensuring one’s status is properly declared to avoid unnecessary taxation. He also highlights the difficulties surrounding nomadic workers in South Africa, where issues with visa regulations and potential tax obligations could create complications for both individuals and foreign employers. Additionally, Louw warns of potential security risks within SARS’s systems, urging taxpayers to maintain accurate and secure contact details to navigate these challenges. He concludes by emphasising the need for clear tax residency definitions and more streamlined processes to manage the complex tax obligations faced by South Africans abroad.
Extended transcript of the interview
Linda van Tilburg (00:09.893)
William Louw, Director of South African Tax at Sable International, is the expert to consult regarding tax matters for non-resident and South African residents who are receiving income from abroad.
I hear rumours of tax returns that have to be lodged where previously they were not requested or required. What are the key challenges that you encounter?
William Louw (01:02.8740
So, what seems to be happening is that SARS is trying to get more information and update their records. Because of this, they’re asking for returns that weren’t previously required. We have two aspects: one is returns that SARS knows should have been lodged, and the other is returns that they are unsure of and are requesting on a broader scale.
The returns that should be lodged typically SARS has the supporting documents and they think that one should have been lodged by the taxpayer. The
taxpayer would then have to do this, but the problem is that the taxpayer might not have old information for older returns. SARS won’t provide this data since they claim it is third-party information issued by the employer on behalf of the taxpayer. So, the taxpayer is sitting with the problem of getting that information.
Then we also have the issue of SARS asking for historic returns without being certain if return should be lodged, applying a somewhat gunshot approach. Taxpayers have two options: locate their old records to see if returns should be lodged or ask SARS to mark those returns as not required, substantiating why they aren’t needed—such as evidence of being outside the country during that timeframe. If you left, for example in 2002 and SARS wants records from 2002 to 2010, then you have to do an affidavit to declare your position to SARS.
Linda van Tilburg (02:50.366)
It seems quite complicated. With double tax treaties, you shouldn’t be paying double tax. Is that enough, or do you have to disclose everything to SARS even if you’re a non-resident?
William Louw (03:08.534)
From SARS’ perspective, if they haven’t been informed that you are a non-tax resident, they’ll assume they can tax everything you’ve earned, even if they might not be allowed to under the DTA. They primarily check their records to see if you’re marked as a non-resident. If not, they will want to tax everything and that’s why tax immigration is crucial, as it influences what SARS is legally allowed to request. Even if a DTA provides relief, SARS may assume that if you haven’t tax immigrated, the DTA doesn’t apply because you’ve not informed them you’ve left. That is why tax immigration is crucial because it determines what SARS is allowed to do.
Linda van Tilburg (03:57.423)
I know of people who were taxed twice in the countries where they’re living and back home. What are the rules regarding that situation?
William Louw (04:04.59)
A lot of tax officers are checking if the tax credits allowed are allowable under the DTA. It’s essential to know your taxing rights. For example, its is becoming more relevant now in the UK where they are looking at pensions and provident fund annuities and saying you need to get your money back from SARS, we are going to tax you in full and not allow tax credits, which can cause double taxation. I worked out a worst case scenario where the effective tax could be upwards of 80%
If you are earning a lot of money, say over R1 million or R2 million worth of pension income in South Africa and it is not taxed in South Africa, SARS is going to charge you tax close to 40% effectively. In the UK at that level, you might be crossing into their 40% bracket, in which case you are sitting with 40% on both sides.
Linda van Tilburg (05:22.042)
Can you help those in that situation?
William Louw (05:25.838)
We can. We assess the scenario thoroughly before informing SARS to avoid complications. Depending on the case, you might need to apply for a Voluntary Disclosure Programme or you can try to initiate the process to reclaim overpaid taxes before disclosing more to other tax offices.
Linda van Tilburg (05:56.519)
Are there any expected tax changes from the government?
William Louw (06:04.634)
I think SARS is closely reviewing the DTAs, especially aspects that were developed without fully considering their impacts on South Africa. For example, the South African Tax Act states that foreign pensions are exempt from South African tax. I’m not sure if SARS plans to override that. They might be considering redoing the double taxation agreements so that those living outside the country are still taxed in South Africa as well as in the other jurisdiction. However, that approach is not the common agreement , which could lead to complications.
Additionally, there’s the proposition from the Western Cape to attract people to work as digital nomads in South Africa. This also has the potential to become messy. There are Home Affairs issues regarding visas, and then there’s the challenge of SARS wanting to tax their earnings. Under current legislation, those working as nomads could theoretically avoid taxes in South Africa for a year or even up to five years if they plan their affairs correctly. In such scenarios, SARS loses taxing rights because of the ordinarily resident test and the physical presence test.
I believe SARS is carefully considering these matters, and we might see changes, particularly concerning the tax treatment of residents working abroad. This could complicate tax situations, especially for those in nomadic work setups. Personally, I would prefer a clearer and simpler definition of a tax resident rather than the current vague one, which relies on ordinary residence and includes a six-year cycle for the physical presence test. That duration feels excessively long and adds to the complexity.
Linda van Tilburg (07:44.848)
Nomad visas from other countries often come with better tax regimes.
William Louw (07:52.43)
I believe most are working to stimulate the economy, but when considering a nomadic system in South Africa, it could potentially increase economic activity without significantly boosting employment growth. South Africa should focus on strategies to encourage job creation, and SARS must address this aspect. It’s going to be challenging for SARS to compel foreign employers to register for tax in South Africa and to manage monthly Pay As You Earn contributions for their employees. Most foreign companies are likely to avoid this requirement, which means that South African tax residents working for these foreign firms may find themselves in a precarious position, potentially facing job loss or the need to relocate.
Linda van Tilburg (08:30)
You mentioned concerns about security— can SARS being hacked?
William Louw (08:56.758)
Yes, there’s always a risk.
You have to remember that SARS is connected to Home Affairs, so if there’s a breach in SARS, access to Home Affairs data could also be compromised, and vice versa. I’m not sure how secure that connection is, but I am pretty sure the government is looking into enhancing security protocols. I’ve noticed that the Mobi app isn’t currently functioning, which raises my suspicion that there may be some issues or vulnerabilities that need attention.
Additionally, the one-time pins they use require an email address and a South African cell phone number. South African cell phone numbers aren’t always retained by foreign taxpayers, leading to the recycling of those numbers within South Africa. This situation presents a security risk and makes it challenging for SARS to update taxpayer details.
Linda van Tilburg (09:48.03)
How can someone navigate all these complexities? What would you advise clients that come to Sable International ?
William Louw (09:53.806)
First and foremost, ensure that all your records are correct. It’s essential to maintain reliable tax compliance by visiting the CTCS page and making sure that everything displays as green. Additionally, always make sure you have your own e-filing login, and update your contact information so that you can easily resolve any issues that may arise. If your details are linked to an old tax practitioner who has since left or closed down their practice, it could create a significant challenge for you to rectify the situation.
It’s also crucial to ensure that the email address, and cell phone numbers associated with your e-filing account are secure and can be controlled by you or someone you trust. If you are living abroad and lack a reliable South African number, consider using a trusted cell phone number.
In cases where the foreign individual cannot find someone in South Africa to trust with their phone number, using an office cell phone number as a temporary placeholder might be a suitable solution. In my opinion, SARS should implement a policy where if a cell phone number is linked to more than three taxpayers or tax numbers, that number should be blocked from being used for one-time pins. This approach would ensure security and allow taxpayers to use their email solely for one-time pin authorisations, which typically works quite effectively.
Linda van Tilburg (12:28.922)
So, becoming a tax resident again has no clear mechanism?
William Louw (12:30.436)
Correct. Currently, there isn’t an established process for returning South Africans to reclaim their tax residency.
Linda van Tilburg (13:39.713)
What are the flags for South Africans earning income from South Africa while living overseas?
William Louw (13:54.554)
In this discussion, we need to consider two key aspects: one is employees working for South African companies, and the other is individuals living abroad who are cashing in their funds from South Africa, typically consisting of retirement annuities, pension funds, or provident funds, and how these need to be handled. Let’s begin with the funds.
When a fund encashes these on behalf of a taxpayer, they must apply to SARS for a tax directive, which informs them of the tax to withhold. SARS then receives that tax, and subsequently, the fund is expected to generate an IRP5. However, in some cases, companies fail to issue these IRP5s, even though SARS has the tax directive on record. When you attempt to file your tax return, SARS will identify the existing tax directive for that tax year and inquire, “Where’s the IRP5?” This often leads to the taxpayer being forced to contact the fund to obtain it, which can be problematic—especially if the funds are reluctant to issue these historical IRP5s.
If you find yourself in such a situation where the fund refuses to issue an IRP5 that should rightfully be provided, please feel free to reach out to us. We can guide you through the process, although it’s worth noting that it can be somewhat lengthy, so patience is necessary.
Now, let’s turn our attention to individuals working for South African companies. Here, it’s important to differentiate between tax events and cash flow events. From a tax perspective, the employer in South Africa must ensure that the IRP5 accurately reflects where the employee was located when they performed work for the South African entity.
Even if the employer deducts Pay As You Earn , which they will default as a safety precaution, they need to be aware of where the works was undertaken. It is crucial for them to indicate on the IRP5 whether they acknowledge that the taxpayer was working outside or inside the country. This distinction changes the source code, clarifying to SARS that the employer is aware of the taxpayer’s location during the work period, allowing for potential tax relief.
Unfortunately, many employers resist making these corrections due to a lack of understanding. The issue is compounded by concerns about fraud within SARS. SARS expects employers to know the location of their employees. If an employer asserts that the taxpayer was physically present in South Africa, SARS will fully tax that income without providing relief, even when the taxpayer may qualify for it.
Additionally, SARS is hesitant to modify these codes internally, understandably due to the significant issues related to corruption and fraud that they face. SARS officials are often rigorously questioned whenever there’s a need for overrides to prevent fraud, leading to delays and complications. Therefore, it’s imperative for SARS to educate employers and funds on how to accurately recode the IRP5s to ensure proper taxation.
Linda van Tilburg (17:18.136)
You mentioned IRP5s. If you are one of the nomads residing in South Africa, it’s important to note that there is no IRP5, as overseas companies will not issue one.
William Louw (17:30.126)
Yes, in that case, you would need to operate as a provisional taxpayer. This involves estimating your income every six months, paying provisional taxes, and later reconciling to determine your final tax liability. If you need assistance on how to navigate this process, don’t hesitate to reach out to us as well. Navigating the tax landscape in South Africa can be quite complex. You’d typically need to distinguish between employees of South African companies and those cashing out funds from local retirement annuities or pension plans. Employers should ensure they report accurately where the work was performed, as it affects tax liability.
Linda van Tilburg (17:50.105)
This is such a complex subject! Thank you for your insights, William.
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