By Jean du Toit
Expatriates and those with plans to emigrate will be relieved to learn that the proposal to impose an exit tax on retirement interests will be withdrawn. In presenting their Draft Response Document on the 2021 Draft Tax Bills, National Treasury and SARS confirmed that the proposal will not be included in final Taxation Laws Amendment Bill that will be tabled in tomorrow’s Medium Term Budget.
The proposed exit tax
The 2021 Draft Tax Bills were published in July this year and arguably the most contentious proposal tabled was the imposition of an exit tax on retirement interests when a South African taxpayer ceases residency.
The reason for the proposed tax was that SARS may in certain instances lose out on the right to tax retirement interests of taxpayers if they cease South African tax residency. The concern lies in the wording of certain double tax treaties that allocate the sole taxing right on these amounts to the country where the taxpayer is resident.
To counter the loss to the fiscus in these cases, it was proposed to trigger a tax on the value of the taxpayer’s retirement interest on the day before the person ceases residency. The tax would only be due to SARS when the benefit becomes payable in future. The proposal was met with fierce opposition.
Expatriates fight back
The proposal constituted an amendment that was again directed at a group of taxpayers that have been affected by year-on-year changes to our tax legislation. The Expatriate Petition Group (EPG), as representative of this group of individuals and with an active membership of 15 000 individuals again pulled together to oppose the proposal.
In opposing submissions submitted by Tax Consulting SA on behalf of the EPG, it was delineated that that the proposal adds to the narrative of marginalisation of the expatriate population and it would further alienate an important part of the South African tax base. But the submission also highlighted other challenges facing the proposal.
Most notably, the proposal was designed to subvert the provisions of the double tax treaties concluded with some of our treaty partners. For a country that has always respected treaty obligations, this would be unprecedented. Enacting domestic legislation to override treaty provisions flouts not only the agreement with the relevant treaty partner but also South Africa’s good faith obligations under the Vienna Convention on the Law of Treaties.
From the taxpayer’s perspective, the knock-on effect would be double taxation, without any recourse, as the tax levied in South Africa would be illegitimate. This would not be the only hardship faced by the taxpayer, as the proposed section would force the individual to incur interest on the postponed tax. Ultimately, the proposal faced a cascade of insurmountable challenges.
Warnings heeded by government
During their feedback session ahead of the Medium Term Budget, National Treasury acknowledged the validity of the comments raised, particularly the concerns around violating international treaty obligations. It was further noted that the proposal will be revisited in subsequent legislative cycles, as this problem must, somehow, be addressed.
While we may see the proposal back on the table in future, the problem can likely only be fixed by renegotiating existing treaties, which will not happen overnight.
Be that as it may, National Treasury’s willingness to engage the public in the law-making process must be applauded, and the fact that the EPG’s warnings were heeded is a most welcome development.
Jean du Toit is Head of Tax Technical at Tax Consulting South Africa.