South African expats are taking hasty steps to avoid expat tax

23 August 2019 3 min. read
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South Africans living abroad who are trying to mitigate the effects of the imminent expat tax are taking a number of missteps in their haste to get their finances in order, according to specialists at Tax Consulting SA. Financial emigration is one area where most appear to be foregoing essential regulatory procedures.

The expat tax has been central to tax discussions amongst South African businesses in recent months. In an attempt to prevent the draining of wealth and talent from the South African economy, the expat tax is an act that allows for taxing wealthy South African expats up to 45% of their income.

The tax will primarily apply to South Africans who earn more than R1 million per year. While some have lauded the measure, others have pointed out the adverse effects that it can have for the economy. For South African expats, the biggest drawback is a major dent in their competitiveness for jobs abroad, given the extra tax consideration that they will require.

Some have even pointed out that the expat tax will deter South African firms from engaging in long-term foreign assignments, for fear of the additional tax costs. Given South Africa’s goal of drawing foreign investment and engaging with the global market, such a scenario could prove highly detrimental.

South African expats are taking hasty steps to avoid expat tax

In any case, South African expats are currently looking to take whatever measures necessary to avoid the hefty taxation. According to Tax Consulting SA experts, these individuals are going to tax consultants for advice, although most solutions currently being offered appear to be shortsighted in nature.

As a result, expats are not only employing the wrong means, but they are also missing important steps along the way. “One of the most common processes being widely publicized is Financial Emigration and has become the weapon of choice when offering South African expats tax relief on their foreign income in preparation for March 2020,” explains Claudia Apicella, Head of Expat Tax Compliance at Tax Consulting SA.

Although, when Financial Emigration is applied for correctly, the process does offer certainty that one has ceased tax residency in South Africa. The key issue here is that the fundamental steps to achieve this are not always adhered to, thus resulting in a process not correctly done which creates tax exposure for South African expats.  The harsh reality is that many expats are undergoing “Financial Emigration”, taking into consideration only the exchange control aspects thereof, and thus not dealing with important tax implications,” she added.

Nicolas Botha, Tax Diagnostic Specialist at Tax Consulting SA, recommended certain processes to avoid this scenario. “It is imperative that when undergoing the financial emigration process through a service provider, that all compliance steps for the financial emigration process are clearly defined by the provider to the client. From a client perspective, the best first step will be to determine if the provider is offering financial emigration or formal emigration. These are often referred to as being the same process, however this is not the case.”