Certificate of Residency versus tax migration

Taxpayers are often confused by the difference between tax residency and tax migration. With the brain drain continuing unabatedly the tax status of individuals leaving South Africa must be understood and managed to avoid unintended tax consequences. This article deals with the distinction between tax residency and tax migration.

Introduction

SARS is acutely aware of the impact of the brain drain resulting in not only the loss of critical skills but also an alarming erosion of the South African tax base. SARS accordingly attempts to protect the tax base as much as possible. In this regard the tax residency of individual taxpayers leaving South Africa becomes a critical enquiry.

This article deals with the difference between tax residency and tax migration. In the next article we shall deal with how to apply to SARS where a person’s tax residency changes.

The taxing regime

An individual that is a resident of South Africa is taxed in South Africa on its worldwide income. Where the person physically performs services outside South Africa on behalf of an employer, an exemption of R1.25 million may apply.

Any natural person that is ordinarily resident in South Africa is therefore a tax resident of South Africa irrespective of the amount of time that the person spends in South Africa or abroad.

A person that is not a resident of South Africa is only taxed in South Africa on income from a source within South Africa.

It is therefore critical to determine the residency of a taxpayer for income tax purposes as a primary enquiry.

Meaning of ordinarily resident in South Africa

Where a person is ordinarily resident has been the subject of many disputes with tax authorities. The general principle applied is a person is ordinarily resident in the country to which he or she would naturally and as a matter of course return from his/her wanderings.

The above test is subjective and must be applied based on the facts of each case.

The onus is on the taxpayer to prove that he/she would not return to South Africa naturally and as a matter of course at any time in the future.

And just when you think this is quite simple …

The above determination may be overridden by double taxation agreements between South Africa and foreign tax jurisdictions.

Enter the double taxation regime …

A double taxation agreement between South Africa and a foreign tax jurisdiction may determine that a person is regarded as a resident of only one of the two territories.

For tax purposes a person would therefore be treated as a resident of only one territory irrespective of whether he/she might be regarded as a resident of the other territory based on the general principles discussed above.

The issue of residency is dealt with in Article 4 of all double taxation agreements.

And this is where the certificate of residence enters …

The certificate of residence

If a person is ordinarily resident in South Africa, he/she cannot migrate their tax residency to another country while it remains ordinarily resident in South Africa.

Article 4 of the double taxation agreement between South Africa and other tax jurisdictions may however deem the person to be only taxed in one of the tax jurisdictions.

The practical challenge for the individual is how to avoid being taxed in both tax jurisdictions. How does the communication between the tax jurisdictions work to avoid both jurisdictions imposing tax on the same amount?

And this is where the certificate of residence comes into play …

A certificate of residency is aimed at implementing Article 4 of double taxation agreements between South Africa and other countries to avoid double taxation.

The certificate is issued to a South African taxpayer that confirms their status in South Africa as a resident of South Africa. The certificate is then made available by the taxpayer to the foreign tax jurisdiction to ensure that the double taxation agreement is properly applied.

A certificate of residence is therefore nothing more than an administrative process to assist different tax jurisdictions to communicate with each other to implement the requirements of a double taxation agreement.

Tax migration versus Certificate of Residence

To apply for tax migration is a decision separate from obtaining a certificate of residence which is an administrative process.

If a taxpayer wishes to migrate their tax status, they are no longer a resident of South Africa for income tax purposes which means that a certificate of residence would be irrelevant.

If a taxpayer remains ordinarily resident in South Africa and therefore subject to the South African taxing rights, the certificate of residence would normally be required by the country in which the taxpayer actually works to ensure the effective implementation of Article 4 of any double taxation.

Summary

This article deals with the nature of residency and the need for a certificate of residence to confirm a taxpayer’s tax residency. In the next article we shall deal with the process to apply for a certificate of residence as well as for tax migration.