Expat Tax 101Tanya Tosen

Senior Tax & Remuneration Specialist - Global Mobility

20 February 2019

Agenda

1. Expatriate vs. “Normal” Employee

2. Expatriate Life Cycle

3. Types of Assignments and Typical Benefits

4. Outbound and Inbound Expatriates

5. Tax Treatment in South Africa

6. Section 10(1)(o)(ii) and Tax law changes from 1March 2020

7. Tax Protection and Tax Equalisation

8. Inbound Expatriates

9. International tax treaty principles and the “183 dayrule”

10. Tax planning and compliance around expatriate fringebenefits

Key objective for today

Expatriate vs. “Normal” EmployeeEmployee – anyone other than an independentcontractor who works for another person/conducts thebusiness of an employer.

Simply put an expatriate is still an employee of thecompany.

• In layman’s terms - professionals or skilled workerstaking positions outside their home country.

• Fixed term contract/secondment agreement (workpermit reasons).

• Labour law issues for the company if not on fixedterm contract can trigger permanent establishment ifon a permanent contract.

• Permanent contract’s attract other costs andexposure risks in the form of social security, pensionfund contributions etc. in host country.

Expatriate Life Cycle Key Processes

Remuneration1.Selection process

2.Mobility policy

3.Structuring of package/package calculator

4.Fixed term contract

5.Involve Finance and otherteams

Work Permit 1.Correct work permit

Payroll1.Efficient structure on

payroll to ensure in a tax neutral position

Tax Compliance1.Filing of tax return should

be break-even based on payroll reconciliations and finalisation

Assignment Types1. Business Trip assignment- <1 Month

Service-based consulting services to establishedbusiness partners in host country.

2. Short-term assignment – 1-6 Months

To assist the operations in the host country in thedevelopment stages.

3. Medium to Long-term assignment - >6 Months

To fully establish the Company’s business in a hostcountry. This may involve numerous Assignees andallows for adequate skills-transfer to local staff.

4. Localisation

To become a permanent resident and employee ofthe host country’s established business. After 5 years –treated like a normal employee.

Typical Expatriate Benefits

Some of the typical core benefits provided to expatriates are as follows:

Home Leave Travel

Medical Insurance

Housing in Host

LocationEducation Cars

Tax Assistance

Typical Expatriate Benefits

Factors to consider when giving benefits to expats:

Seniority level of the

assigneeFamily size

Host country practice

Length of assignment

Purpose of the

assignment

Delivery of benefits should be as tax efficient as possible as wellas should be easy to administer these benefits

Outbound vs. Inbound Expatriates

Outbound Expatriate In relation to HomeCountry

In relation to Host Country

Seconded Out

Seconded In

Host Country

Home Country

Inbound Expatriate

Tax Treatment in South Africa

1. Residents – Taxed on their worldwide Income

2. Non-residents – Taxed only on income for the number of days physically worked in South Africa.

Residents mechanism for tax relief – Section 10(1)(o)(ii)

Currently, if a South African resident works in a foreigncountry for more than 183 days a 12 month period, allearnings from foreign employment exempt from SouthAfrican tax, subject to certain conditions.

Conditions:

1. Period exceeding 183 days in any 12-month period

AND

2. 60 Consecutive days in 12-month period

Tax law changes from 1 March 2020

for Outbound Expatriates

Section 10(1)(o)(ii) Proposed change from 1 March 2020

From 1 March 2020, if a South African resident works in a foreigncountry for more than 183 days in a 12 month period, foreignemployment income earned is exempt from tax only on the first R1million, subject to certain conditions.

Conditions:

1. Period exceeding 183 days in any 12-month period

AND

2. 60 Consecutive days in 12-month period

Tax PoliciesTax Equalisation1. No better nor worse off from a tax view .

2. Same amount of tax as if he had remained at home.

3. Tax-neutral for the expatriate.

Hypothetical Tax1. Amount of tax calculated on the earnings should the

expatriate have remained in the home country.

2. Not actual tax as section 10(1)(o)(ii) usually applies fora South African.

3. Helps to settle/extinguish some of the tax liability thatarises in the host country.

Tax Protection1. Expatriate should pay no more tax than if he had

remained at home.

2. If the tax in the host country is higher, employer paysthe excess.

3. If tax in host country is lower, benefit passed toemployee.

Tax Equalisation & Tax Protection

Tax Equalisation

Tax Protection

Tax Protection is the same as scenario 1, but differs as scenario 2 would look as follows:

Practical example of a

build-up calculation

South African Build-up Calculation

South Africa

Normal Earnings

Salary 1,000,000R

Less Hypothetical Tax (on R1 Million) 410,000-R

Net salary in Home Country 590,000R

Plus cost of living allowance for assignment 300,000R

Guaranteed Net Earnings 890,000R

A South African (assuming 41% tax bracket) goes on a long term assignment.

Practical examples of

Tax Equalisation

Madagascar Sweden

Equalisation Equalisation

Salary 1,000,000R 1,000,000R

Cost of living allowance 300,000R 300,000R

Total 1,300,000R 1,300,000R

Hypothetical Tax (on R1 Million) 410,000R 410,000R

Tax Payable in Host Country 20% 260,000R 728,000R 56%

Employee Net Salary

Gross Earnings 1,300,000R 1,300,000R

Less Hypo Tax 410,000-R 410,000-R

EE Net Salary (tax = hypo tax) 890,000R 890,000R

Employer Cost

Gross Earnings 1,300,000R 1,300,000R

Plus Actual Tax in Host Country 260,000R 728,000R

Less Hypo Tax 410,000-R 410,000-R

ER Cost 1,150,000R 1,618,000R

A South African (41%) goes on assignment to Madagascar (20%) or Sweden (56%)

Practical examples of

Tax Protection

Madagascar Sweden

Protection Protection

Salary 1,000,000R 1,000,000R

Cost of living allowance 300,000R 300,000R

Total 1,300,000R 1,300,000R

Hypothetical Tax (on R1 Million) 410,000R 410,000R

Tax Payable in Host Country 20% 260,000R 728,000R 56%

Employee Net Salary

Gross Earnings 1,300,000R 1,300,000R

Deduct the lesser of Hypo or Actual Tax 260,000-R 410,000-R

EE Net Salary (lesser of hypo or actual tax) 1,040,000R 890,000R

Employer Cost

Gross Earnings 1,300,000R 1,300,000R

Plus Actual Tax in Host Country 260,000R 728,000R

Less Hypo Tax 260,000-R 410,000-R

ER Cost 1,300,000R 1,618,000R

A South African (41%) goes on assignment to Madagascar (20%) or Sweden (56%)

Who benefits where?

Madagascar Madagascar Sweden Sweden

Protection Equalisation Protection Equalisation

Employee Net Salary

Gross Earnings 1,300,000R 1,300,000R 1,300,000R 1,300,000R

Deduct the lesser of Hypo or Actual Tax 260,000-R 410,000-R 410,000-R 410,000-R

EE Net Salary (lesser of hypo or actual tax) 1,040,000R 890,000R 890,000R 890,000R

Employer Cost

Gross Earnings 1,300,000R 1,300,000R 1,300,000R 1,300,000R

Plus Actual Tax in Host Country 260,000R 260,000R 728,000R 728,000R

Less Hypo Tax 260,000-R 410,000-R 410,000-R 410,000-R

ER Cost 1,300,000R 1,150,000R 1,618,000R 1,618,000R

Incremental Tax

Host Country Taxes 728,000R 728,000R

Less Hypo Tax 410,000-R 410,000-R

318,000R 318,000R

EE Benefits

ER Benefits

Advantages & Disadvantages of

Tax Equalization & Tax Protection

Pros Cons

1 Assignments Tax Neutral Expensive to administer

2 No financial surprises to assignee Onus on company to be compliant

3

Place the correct expats in the

right location as they don't pick

and choose

4

Benefit for companies for

assignments in low tax countries

Pros Cons

1

Expat benefits from lower tax rates

which incentivises them

May cause resistance to mobilise

to higher-tax countries

2

Employer loses out on cost savings

as these are passed to expat

3

Compliance risk as expat may

under report taxable income

Equalisation

Protection

Non-residents

Taxability in South Africa

1. Taxed only on income in South Africa for the number of daysphysically worked there or specifically on source income.

2. Therefore you can apportion income between South Africanand Foreign-sourced income.

3. SARS accepts that work days must be used with the followingformula.

Non-residents tax

calendar

Non-residents

Taxability in South Africa

1. One of the best tax structuring mechanisms available to non-residents is the R25 000 monthly exemption for employerprovided accommodation in the first two years of theassignment.

2. Conditions for this benefit:

• Employee should not be present in the Republic in excessof 90 days in the year of assessment preceding the date ofarrival.

• Cash amount of the benefit should not exceed R25 000.

International tax treaty principles

and the “183 day rule”

What is a DTA? Double Tax Agreement

1. In layman’s terms - indicates who has first taxing rights

Full Explanation:

2. A tax treaty/DTA is a bilateral agreement made by two countries toresolve issues involving double taxation of passive and activeincome.

3. Tax treaties generally determine the amount of tax that a countrycan apply/withhold to a taxpayer's income, capital, estate, andwealth.

International tax treaty principles

and the “183 day rule”

3 DTA Protection Principles Normally found in Article 15 of every DTA

Notwithstanding the provisions of paragraph 1‚ remuneration derived bya resident of a Contracting State in respect of an employment exercised inthe other Contracting State shall be taxable only in the first-mentionedState if:

1. the recipient is present in the other State for a period or periods notexceeding in the aggregate 183 days in any twelve-month periodcommencing or ending in the year of assessment concerned; and

2. the remuneration is paid by, or on behalf of, an employer who is nota resident of the other State; and

3. the remuneration is not borne by a permanent establishment whichthe employer has in the other State.

Practical Example

ScenarioI, as a South Africa tax resident and employee of Tax Consulting have been assigned to go work in Australia for 5 months.

QuestionWill I be taxable in both South Africa and Australia?

Answer1. I will not meet section 10(1)(o)(ii) as my assignment is less than 183 days.

Therefore I am fully taxable in South Africa.

2. According to the “DTA” principle explained previously, I will not be subject to tax in Australia only if all 3 of the following conditions have been met:

1. I am not present in the other State i.e. Australia for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the year of assessment concerned; and

2. my remuneration is paid by, or on behalf of, Tax Consulting who is not a resident of the other State; and

3. the remuneration is not borne by a permanent establishment which Tax Consulting has in the other State.

Why Comply?

1. SARS consistently not meeting targets on an annual basis.

2. Expatriate taxes one of the most complex areas of tax to administer and easy way to make sizeable money back in the form of audits.

3. Most expat tax returns are notbeing done correctly after indepth analysis.

4. CRS (Common ReportingStandards) – From June 2017South Africa committed tojoin. Effort to combat taxevasion. This means yourglobal earnings are now beingshared with SARS from variousbanks and financialinstitution’s globally.

Why Comply?

Tax Planning & ComplianceWork Permits• More critical than tax - if not done correctly is a

criminal offence.• Reputational damage to the organisation. • Expat should not be active on payroll on a date

before approved work visa.• Critical visa work permit – some expats apply for

permanent residency which means you become a tax resident. No tax planning available.

• Immigration should not be seen in isolation –always consider tax as well.

• Business visa when working in SA = illegal. Directors subject to fine/imprisonment and 3rd

offence imprisonment only.

Tax Planning & Compliance2020 change to section 10(1)(o)(ii)

Consider Financial Emigration

What is this?• Formal process through SARS and SARB - endorsed by

South African parliament. • Ceases tax residency only on foreign income and

investments.

Who should consider?• South African tax resident working/living abroad with a

permanent intention not to return to South Africa in the near future or indefinitely.

• Individuals married to SA spouse, spouse needs to financially emigrate and have to be abroad.

Tax Planning & Compliance

If you remain tax resident?

• If you are a South African working abroad - legally required to submit tax returns to SARS annually and declare foreign earnings.

• Claim section 10(1)(o)(ii) if you qualify. Remember first R1 million exempt.

If you don’t FE – then you can utilize DTA if applicable?

• Yearly process consisting of tax residency certificate from other country.

• Onus of proof on Taxpayer to prove to SARS i.e. centreof vital interests, habitual abode, assets etc.

• More for single individuals, starting to work abroad.• Not applicable for expats on rotation, independent

contractors.

Tax Planning & Compliance2020 change to section 10(1)(o)(ii)

Other Considerations

• Tax policy changes – to incorporate the changes of the R1 million exemption.

• Cost to the company – need to quantify in tax equalized policy, this additional cost that will be incurred.

• Changes to payroll and how to administer the mechanics around these changes.

• Impact to the expatriate on the net pay and communication and explanation of these changes to the expatriates.

Tax Planning & ComplianceOther Considerations

• Consider additional statutory charges in thehost country like Social Security, somecountries have Aids Levy. Employee andEmployer Social Security – gross up to be ina tax neutral position.

• Taking advantage of accommodation exemption for non-resident inbound expatriates.

tanya@remunerationconsultants.co.za

011 467 0810

www.remuneration consultants.co.za

tanya@taxconsulting.co.za

011 467 0810

www.taxconsulting.co.za