This week, we’re looking at double taxation. If you’re a foreign individual working in South Africa, you may face the risk of being taxed twice – once in your country/countries of tax residence if those jurisdictions tax on a worldwide-income basis, and again in South Africa on the income arising from services rendered under the source-based system.
There are two types of double taxation:
- Juridical double taxation occurs when two or more tax jurisdictions impose similar taxes on the same taxpayer for the same income or capital.
- Economic double taxation arises when two or more tax jurisdictions levy comparable taxes on different taxpayers in relation to the same income. For example, company profits may be taxed at the corporate level and then again when distributed to shareholders.
Double Taxation Agreements (DTAs)
To mitigate the risk of double taxation, South Africa has Double Taxation Agreements with a number of countries, including 23 in Africa and 56 across the world.
The DTAs exist to relieve or avoid double taxation through either the exemption method, the credit method or the deduction method. Let’s look at these in more detail:
- Under the exemption method, income that has been taxed in another jurisdiction is excluded from domestic taxation.[1]
- The credit method allows taxpayers to offset domestic tax liability with foreign tax already paid on the same income.[2]
- Under the deduction method, foreign income is included in taxable income, but the taxpayer is allowed a deduction for the foreign tax paid.
Section 108 of the Income Tax Act 58 of 1962 (“the Act”) provides that a DTA has the force of law as if enacted in the Act. In other words, should there be conflict with domestic legislation, the provisions of the DTA generally take precedence, although the outcome depends on how the domestic law interacts with the treaty.[3]
In closing, if you’re a foreign individual rendering services in South Africa, you need to determine if your tax residence country/countries have a DTA with South Africa and how it applies. Consult with your personal tax advisor or accountant to ensure that you take appropriate measures to claim any exemption, credit, or deduction available in your country of tax residence.
No doubt this will involve some paperwork – starting with documentation of the South African taxes you’ve already paid.
Notes
[1] Organisation for Economic Co-operation and Development (OECD) Article 23A.
[2] OECD Article 23B.
[3] Hattingh PJ “Elimination of International Double Taxation” in De Koker A and E Brincker (eds) Silke on International Tax, para 36.14.
Tax Tuesday
Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts at AJM Tax share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday.
