A case study review and reasonability assessment of the foreign employment income tax exemption threshold in section 10(1)(o)(ii) of the Income Tax Act

Abstract

This research paper, by means of a case study, evaluated whether the foreign employment income tax exemption threshold in section 10(1)(o)(ii) of the Income Tax Act achieved its objectives: first, limiting the impact of the amendment to the exemption in respect of South African tax residents earning low or moderate levels of remuneration in either the United Arab Emirates (low-income tax rate jurisdiction) or the United Kingdom (high-income tax rate jurisdiction); and, second, spared tax residents earning remuneration in the United Kingdom of making additional ‘top-up’ tax payments to the South African Revenue Service. The case study assessed the tax position of a South African tax resident earning low, moderate or high levels of foreign remuneration in either the United Arab Emirates or United Kingdom, based on three mutually exclusive assumptions: first, had the full exemption continued to apply (as was effective on 29 February 2020); second, had the exemption threshold applied (effective from 1 March 2020, in terms of the 2020 Budget Review; not yet legislated at the time of writing the research paper); and, third, had the exemption, in full, been repealed (as proposed in terms of the Draft Taxation Laws Amendment Bill of 2017). The reasonability of the current threshold value was assessed by comparing it to the minimum threshold value required to achieve a break-even tax position in the Republic.

Keywords:

• Foreign employment income tax exemption
• Foreign Remuneration
• Section 10(1)(o)(ii)
• section 6quat tax credit
• United Arab Emirates
• United Kingdom

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Such remuneration includes salaries, taxable benefits, leave pay, wages, overtime pay, bonuses, gratuities, commissions, fees, emoluments, allowances including travel allowances, advances or reimbursements, broad-based employee share plan amounts and amounts derived from share vesting. It excludes payments made in respect of the relinquishment, termination, loss, repudiation, cancellation or variation of employment or office (SARS, 2019, p. 4; SARS, 2020, p. 3; Nel & Faber, 2020, p. 5).

2 A ‘resident’ is defined in section 1(1) of the Act as a natural person who is ordinarily resident in the Republic in terms of the South African common law, or, a person who is ordinarily resident outside the Republic and is then deemed to be a resident of the Republic (treaty country resident) by fulfilling the requirements of the physical presence test.

3 Calendar days in employment (not merely days worked) (SARS, 2020, p. 4).

4 Dated 17 July 2017.

5 Promulgated 18 December 2017.

6 The United Arab Emirates and United Kingdom were selected for analysis, as these jurisdictions represented low (marginal tax rate: 0% (2020)) and high (marginal tax rate: 45% (2020)) income tax rate jurisdictions, respectively. Available from https://home.kpmg/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/individual-income-tax-rates-table.html (Accessed 28 July 2020)

7 The Global Wealth Report 2019, published by Credit Suisse, noted the middle-class band of wealth to range from $10 000 (R144 484) to $100 000 (R1 444 843). The remuneration level for moderate-income earning tax residents was, thus, set at R500 000 (approximate mid-value within this range) for the purposes of this research paper (Credit Suisse, 2019, p. 9).

8 The Rand-equivalent value of foreign remuneration earned. Foreign currency amounts were translated to South African Rand, at available average exchange rates: £1:R18.6445 (SARS, 2020d); AED1:R 4.226485 (Available from https://www.ofx.com/en-gb/forex-news/historical-exchange-rates/yearly-average-rates/ (Accessed 29 July 2020))

9 A period exceeding 183 full days, in aggregate, in a 12-month period, of which at least 60 full days were continuous.

10 Financial emigration refers to the process of obtaining approval from the South African Reserve Bank to emigrate from the Republic for exchange control purposes (SARS, 2019, p. 5).

11 Defined in section 1(1) of the Act.

12 R200 000/(R4.226485/AED1) = AED47 320.65

13 R500 000/(R4.226485/AED1) = AED118 301.61

14 R3 000 000/(R4.226485/AED1) = AED709 809.69

15 Limited to R1 250 000 threshold.

16 Limited to R1 250 000 threshold.

17 R200 000 x 18% = R36 000

18 R105 429 + 36% x (R500 000 − R445 100) = R125 193

19 R559 464 + 45% x (R1 750 000 − R1 577 300) = R637 179

20 R559 464 + 45% x (R3 000 000 − R1 577 300) = R1 199 679

21 Defined in section 1(1) of the Act.

22 R200 000/(R18.6445/£1) = £10 727.02

23 R500 000/(R18.6445/£1) = £26 817.56

24 R3 000 000/(R18.6445/£1) = £160 905.36

25 Personal allowance threshold of £12 500 for remuneration less than £100 000.

26 Personal allowance reduced to £0 as income earned in the United Kingdom exceeded £125 000. (20% x (£37 500)) + (40% x (£150 000 − £37 500)) + (45% x (£160 905.36 − £150 000) = £57 407.41 Available from https://www.gov.uk/government/publications/rates-and-allowances-income-tax/income-tax-rates-and-allowances-current-and-past#tax-rates-and-bands

27 20% x £14 317.56 = £2 863.51

28 £2 863.51/(£1/R18.6445) = R53 388.75

29 £57 407/(£1/R18.6445) = R1 070 334.32

30 R200 000 x 18% = R36 000

31 R105 429 + (36% x (R500 000 − R445 100)) = R125 193

32 R559 464 + (45% x (R1 750 000 − R1 577 300)) = R637 179

33 R559 464 + (45% x (R3 000 000 − R1 577 300)) = R1 199 679

34 R1 070 334; Limited to R637 179 x R1 750 000/R1 750 000 = R637 179

35 R1 070 334; Limited to R1 199 679 x R3 000 000/R3 000 000 = R1 199 679

36 The tax payable in the United Kingdom on £160 905 equalled £57 407. It was converted to South African Rand at the available average exchange rate and equalled R1 070 334. The maximum section 6quat tax credit to be claimed equals the total foreign tax payable.

37 No normal tax would be incurred where the taxable income equates to R0. Thus, gross income of R200 000 – minimum exemption threshold value = R0; Minimum exemption threshold value = R200 000

38 R53 388.75 = R37 062 + 26% x (R500 000 − minimum exemption threshold value − R205 900); Minimum exemption threshold value = R231 304.81

39 No tax would be incurred where the taxable income equates to R0. Thus, gross income of R200 000 – minimum exemption threshold value = R0; Minimum exemption threshold value = R200 000

40 No foreign tax is levied in the United Kingdom due to the application of the personal allowance. No section 6quat tax credit may, thus, be claimed.