Tick the right boxes to claim credit on foreign taxes

By Amanda Visser

People do not enjoy paying tax. It is even less enjoyable when they have to pay double tax on the same income. This is possible when an individual works outside of South Africa and does not qualify for the foreign employment income exemption or their remuneration exceeds R1,25 million.

South African tax residents may claim a credit on the foreign tax paid, but there are certain criteria that they will have to meet, says Carmen Westermeyer, tax partner at Maitland and Associates.

According to her a key concern for persons earning foreign remuneration is how to prove that they have paid foreign taxes. In order to be successful in claiming the credit there are certain criteria that must be met:

  • There must be a foreign tax.
  • The tax must actually be paid by the taxpayer.
  • It must be foreign income.
  • It must be included in the South African taxable income.

Westermeyer says if any of the criteria are not met, the taxpayer will not qualify for the credit. This may happen if the taxes were levied incorrectly or in contravention of the Double Tax Agreement (DTA) with South Africa, the foreign earnings are either exempt or result in an assessed loss or the amount paid is not actually a tax, for example rates or certain health insurance payments.

During a recent webinar hosted by The Tax Faculty, Westermeyer gave an example of a foreign subsidiary withholding dividends tax at a rate of 30% on the amount payable to a South African company.

The subsidiary is based in the UK and in terms of the DTA it is only allowed to withheld dividends tax of 15% or 5% depending on the criteria.  In this instance the South African company will not be entitled to claim a full credit on the foreign tax paid since it was levied in contravention of the tax treaty.

Documentary requirements

The documentary requirements may on the face of it seem simple enough, but most people will either not have it automatically at hand, or will not necessarily understand it correctly, says Westermeyer in an article published by Accountancy SA.

The basic information that will be required includes the foreign tax year during which the income was received. In South Africa the tax year is March to February, but in the foreign country it may be from January to December.

SARS will also want to know the name of the country and the name of the tax that was levied, as well as the legislation under which the tax was imposed and the body and status of the authority (national or local) that levied the tax.

If the income earned in the foreign jurisdiction is less than R1,25 million, the South African tax resident will not be liable for tax in SA. However, if it exceeds the exempt amount or if he does not qualify for the credit, their SA employer can apply to the South African Revenue Service (SARS) for a directive.

The directive will allow the employer to calculate the amount of employee’s tax to be withheld monthly from the remuneration on a different basis.

The calculation will take the potential foreign credit into account to reduce the rate of tax that must be withheld in South Africa for employee’s tax (Pay-As-You-Earn) purposes. If there is no directive the taxpayer must claim the credit in their annual tax return.

Taxpayers who qualify for the foreign income exemption must be a South African tax resident; they must be working abroad (even if the employer is based in South Africa), and they must be an employee. They must be abroad for 183 days in a 12-month period, of which there must be 60 consecutive days.

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