New provisions on expat tax unlikely to stop financial emigration

Attempts in the new budget statement to prevent South African expats from terminated their tax residencies might do little to solve the problem, according to Tax Consulting SA executives. According to Jonty Leon and Jean du Toit, most expats are already in the process of financial emigration.

The expat tax has been a controversial subject for a sustained period in South Africa. The legislation taxes South Africans living abroad who earn more than R1 million, with levies extending up to 45%. Many in the South African advisory sector have warned of unwarranted consequences that the tax might have on the economy.

Some have worried about the competitiveness of South African candidates for jobs abroad, given that the new tax will drive up salary expectations. Others have highlighted how many South African expats have reacted to the legislation by starting the financial emigration process, which means the country will lose several tax residents.

The government’s response in the latest budget statement delivered on Wednesday was to increase the cap on the expat tax exemption to R1.25 million. However, Leon and Du Toit from Tax Consulting SA have stressed that the new cap on the exemption might not prove effective.

“The increase will unfortunately assist with only a small group of South Africans working abroad, and merely dangles a carrot for the rest of those abroad to entice them to remain within the South African tax net,” said Leon. According to Du Toit, the government previously ignored warnings that the cap would be detrimental.

According to him, the government actively sought the termination of tax residency among those who had begun the process. “This view was short-sighted and has come back to haunt government as South Africans have in many cases chosen to financially emigrate and thus cease their tax residency with South Africa to avoid paying the expat tax,” he said.

“The current loss of revenue and potential future loss with South Africans continuing to cease residency means that the expat tax has backfired before it has even become effective. The expat tax will continue to be disadvantageous for the South African tax resident, as well as for the South African tax base,” added Leon.