Independent contractors that work internationally may not always know where they should pay tax, especially if they are staying long term in a foreign country. Most countries impose taxes on two types of income; either earned within the country’s borders by anyone, or earned outside the country by tax residents (foreign renumeration).
This is true in South Africa as well, and if you are an expat contractor working in the country you should be aware of an upcoming change to the tax laws. This change will also affect South African contractors who may work and earn income abroad.
Are You a Tax Resident in South Africa?
The first thing to find out is if you are a tax resident in South Africa. ‘Tax residency’ is a special designation that is different from simply being a resident or a citizen. You can be a tax resident of a South Africa while still being a legal resident of your home country, or you can be a South African citizen working abroad and not be classified as a tax resident.
Physical Presence Test
There is test in South Africa to determine if you are a tax resident which is based on ‘physical presence’, using all three of these scenarios:
- 91 days in total during the year of residency assessment, and
- 91 days in total during each of the five years of assessment preceding the year of residency assessment, and
- 915 days in total during those five preceding years of assessment.
This won’t apply to most contractors, unless you have been in South Africa almost continually for the past three to five years. But, if you do meet the test as a tax resident and have any income in other countries during the year, you will have to pay tax in South Africa. Tax residency will apply to most South African citizens, unless they can meet the non-resident test.
South African Citizens: Non-Resident Test
There is separate test to determine if a South African citizen is not a tax resident, and that is if they stay outside the country for more than 183 days during the year (with one trip longer than 60 consecutive days). This means that you do not have to pay tax on worldwide income, and only on any income that you might have earned in South Africa.
South Africa’s Current Position on Taxation of Foreign Renumeration
Currently in South Africa, all foreign renumeration earned abroad for non-tax residents is exempt from tax, but that is about to change.
Cap on Exemption to Begin March 1, 2020
In 2020, the exemption is going to be capped for income earned abroad at R1 million (about US$70,000) per year. Any amounts earned over that will be taxed at normal rates. The problem that this creates for a contractor with foreign renumeration, is that of double taxation, since they will also be paying tax in the country where they are working.
Double Taxation and Foreign Tax Credits
The solution for many will lie in Double Taxation Treaties (DTT) and South Africa has a DTT with 60 countries. The DTT basically provides tax relief for any excess tax paid in the form of a credit. The DTT must be in the country where you are working, and you have to stay longer than 183 days.
Who is Affected by This Change?
You may be wondering if you will be affected by this change, so here is the summary:
- Expats working in South Africa who do not meet the physical presence tax residency test, can earn any amount in foreign renumeration tax free
- South Africans that work more than 183 days abroad in the year, earning less than R1,000,000 in foreign renumeration will still be tax exempt
- Both expats and South Africans that meet the tax residency requirement, and earn more than R1,000,000 annually will pay the tax, but could get a credit with a DTT
- Tax residents earning more than R1,000,000 per year, but in a country without a DTT will pay extra tax