Defeating Section 10(1)(o)(ii) of the income tax act within the parameters of South Africa's general anti-avoidance rules

Abstract

Background: The foreign remuneration exemption contained in Section 10(1)(o)(ii) of the Act was capped at R1.25 million with effect from 1 March 2020. This amendment gave rise to so-called expat tax, namely South African expats being subject to tax in South Africa on foreign remuneration income exceeding R1.25 million. The amendment to the legislation came in response to the situations of double non-taxation created by its predecessor which allowed for a full exemption of foreign remuneration earned by South African expats working abroad. In particular, expats rendering employment services in host countries imposed little or no taxation on the respective employment income, such as the UAE, meaning that tax leakage was rife. The response to the amended Section 10(1)(o)(ii) of the Act has resulted in a mass exodus of expats who are choosing to cease tax residency in South Africa through the application of a DTA tie-breaker clause, deeming them exclusively tax resident in the other country for purposes of the DTA. South African expat tax is avoided as sole taxing rights of remuneration income is usually awarded to the source country. The act of ceasing tax residency through the operation of the permanent home criterion of a DTA tie-breaker clause against the backdrop of the South African GAAR provides the basis of analysis in this study. Main purpose of study: The study undertook to analyse whether the Section 80A–80L of the GAAR could be triggered by South African expats seeking to cease tax residency in South Africa through application of Article 4(2) of the SA/UAE DTA. The studied focused on the first criterion of the DTA tie-breaker clause, namely, the ‘permanent home’. This criterion was analysed and applied to practical scenarios common to South African expats in a quest to determine whether the GAAR’s application is warranted. Method: A doctrinal approach was followed in the study which entailed sourcing information on Section 10(1)(o)(ii) of the Act from international instruments such as the OECD MTC 2017 and its Commentary, the South African GAAR, domestic and international case law, text books, journal articles, webinars, video recordings of lectures, and consultations with tax experts. Once sourced and analysed, the information contained in these sources was transposed and applied to the set of facts under consideration for the study to have practical effect. Results: The study found that a variety of factors contribute to the mass exodus of taxpayers leaving South African shores for greener pastures. These factors may be indicative of a legal tax revolt since the study found that breaking of tax residency by invoking the permanent home criterion of the tie-breaker test did not fall foul of the South African GAAR. The capping of the Section 10(1)(o)(ii) exemption incentivises expats to break their tax residency and so escape application of the exemption to the expat’s foreign remuneration income. However, when residency is broken an exit charge is triggered on the expat’s worldwide asset base (except those remaining in the capital gains tax net such as immovable property in South Africa), since SARS claims that it would have received this capital gains tax if the expat had sold the assets whilst being ordinarily tax resident in South Africa. Dual resident expats who seek to cease tax residency in South Africa bear the burden of proving that their permanent home for purposes of the DTA tie breaker is in the other Contracting State and not in South Africa. The study illustrates that since South African domestic law provides for the breaking of residency by invoking the DTA tie-breaker clause and therefore the disapplication of Section 10(1)(o)(ii) of the Act, and since numerous expats are choosing to invoke the DTA tie-breaker clause to cease tax residency, that the actions taken in this regard are normal, they do not meet any of the tainted elements contained in the South African GAAR and cannot be classified as impermissible avoidance arrangements. Conclusions: South African expats who notify the Commissioner of the intention to apply the DTA tie-breaker clause contained in Article 4(2)(a) of the SA/UAE DTA and therefore cease tax residency in South Africa will not trigger application of the South African GAAR, since none of the tainted elements housed in Section 80A(b)–(c) of the Act are met.