Will the steps taken by South African expatriates to circumvent section 10(1)(o)(ii) trigger the South African GAAR?ar?

Abstract

Background: Prior to 1 March 2020, South African expatriates working abroad were exempt from paying tax in South Africa on remuneration earned abroad in terms of Section 10(1)(o)(ii) of the Income Tax Act No.58 of 1962 (referred to as ‘the Act’ from here forth). However, with effect from 1 March 2020, South African expatriates working abroad are now liable for tax in South Africa on remuneration earned abroad above the cap of R1.25 million.

The reason for the amendment to the Act is to prevent double non-taxation. Double non- taxation arises when a South African expatriate is working in a tax-free jurisdiction, for

example the United Arab Emirates (UAE; the country used as reference for the purposes of this study), where no tax is levied on remuneration earned. In this instance, the South African expatriate would not pay tax in South Africa nor the UAE on income earned in the UAE. The introduction of the amendment was introduced to curtail this. South African expatriates reacted with disapproval of the Section 10(1)(o)(ii) amendment and many have intentions of circumventing the Section 10(1)(o)(ii) amendment by ceasing South African tax residency. Main purpose of study: Many South African expatriates are opting to cease residency in South Africa to circumvent the implications of the amendment to Section 10(1)(o)(ii). One of the ways that a South African expatriate is able to cease residency in South Africa is by invoking one of the tiebreaker clauses contained within the double tax agreement (DTA) between South Africa and the UAE. This study focused on the DTA tiebreaker clause of the ‘centre of vital interest’. This study attempted to explore whether the actions taken by South African expatriates to invoke the DTA tiebreaker clause of the centre of vital interest to cease South African tax residency triggered the provisions of the South African General Anti- Avoidance Rules contained in Section 80A–80L of the Income Tax Act (GAAR).

Method: This study followed a doctrinal approach. Information on Section 10(1)(o)(ii) of the Act, DTAs and the South African GAAR was obtained from websites, journals, textbooks, and case law. This was then analysed and interpreted to help answer the research question. Results: This study found that that the sole or main purpose of the actions taken by South African expatriates to cease South African residency is to obtain a tax benefit, as they would have to pay tax in South Africa on foreign earned remuneration post the Section 10(1)(o)(ii) amendment if they remain South African residents. Ceasing South African tax residency means that South African expatriates will not be taxed in South Africa on income earned in the UAE, resulting in double non-taxation, which is a tax benefit as defined in terms of Section 1 of the Act. As a result of this, the tainted elements were analysed to determine whether the GAAR will be triggered. None of the tainted elements were met and this study confirmed that the actions taken to cease South African residency do not contain any tainted element, resulting in the South African GAAR not applying to the arrangement. Conclusions: The actions taken by South African expatriates to invoke the DTA tiebreaker clause of the centre of vital interest and hence cease tax residency in South Africa will not result in the provisions of the South African GAAR being triggered.