Tax challenges for Middle East South African expatriates

South Africans are among a growing number of global expatriates in Saudi Arabia and the United Arab Emirates (UAE) who are forced to return home due to strict local employment targets.

Commonly known as Saudization and Emiratisation, these policies aim to increase and ensure more jobs are filled by Saudi and UAE nationals.

For many South Africans and other expatriates who have been working in these countries for several years, the changes come as a surprise, especially for those working in industries designated to employ more nationals, such as health, communication, information technology, education, construction and mining and quarrying.

Saudi Arabia, Qatar and the UAE are very popular destinations among South African expatriates and an estimated 66% of the total workforce is made up of expatriates from different parts of the world. The countries attract workers with their tax-free economies and abundant job opportunities. However, with more emphasis on hiring of local nationals, many South Africans living in Saudi Arabia, Qatar and the UAE are now unexpectedly out of work, forcing them to return to their home country. This is resulting in tax challenges for SA expatriates.

The tax consequences of returning home

One of the biggest risks for returning South Africans is the scrutiny of their tax affairs by the South African Revenue Service (SARS). South Africans who have moved abroad and did not formally cease their tax residency, may find themselves facing significant tax bills. Due to ignorance, some did not declare their foreign income during their time abroad or stopped filing tax returns and neglected their tax affairs with SARS after they left South Africa. These SA expatriates now face tax challenges.

Historically, many South Africans assumed that by just moving abroad, they would automatically be free from SARS, but that is not the case if you haven’t formalised your non-tax residency status. Global transparency makes it increasingly difficult for expatriates to evade their tax obligations. The Common Reporting Standards (CRS), an initiative by the Organisation of Economic Co-Operation and Development (OECD), facilitates the exchange of financial information between revenue authorities worldwide, preventing taxpayers from hiding income earned outside their country of tax residence. 

For South African expatriates, this means that SARS has been tracking and identifying income earned abroad. This poses an element of risk as there can be a period of historic non-compliance – something SARS does not take kindly to. 

Planning ahead: Avoiding tax issues when returning

The first step before leaving South Africa to work and live abroad, should be professional tax planning but for many that ship has sailed. Now many South Africans who are forced to return home while their tax affairs are not in order, must explore other remedies to ensure they are tax compliant.

If they have not ceased tax residency temporarily under a Double Tax Agreement (DTA) or permanently through financial emigration, chances are many owe SARS tax on their worldwide income during the years of absence. 

A DTA is an internationally binding agreement between two countries, designed to avoid double taxation of income. It specifies rules for allocating taxing rights to one country in favour of the other. Just because South Africa has DTAs in place with Saudi Arabia and the UAE, does not mean it kicks in automatically to protect worldwide income from a tax obligation in South Africa.

South African tax residents working abroad can make use of the so-called expat exemption, applicable under certain conditions, which provides tax relief for foreign income up to R1.25 million per year of assessment. For protecting income above this threshold, ceasing tax residency becomes a viable option.

Time is of the essence

Non-tax residents must inform SARS within 21 business days of returning or once they formalised the intention to settle permanently in South Africa, of the change in their tax residency status. The Non-Resident Confirmation Letter issued by SARS to acknowledge non-residency, puts this obligation on the taxpayer. 

It is possible to correct one’s tax affairs retrospectively, but time is of the essence once you return to South Africa. Individuals who left South Africa many years ago and who are assessable on income and gains during the period of absence, can backdate the request for cessation of tax residency to the date they physically left. This can be done either under the DTA or financial emigration process.

Recommencing tax residency in South Africa

Expats who have completed financial emigration but have to return permanently, must furnish SARS with compelling reasons and an explanation to recommence tax residency because they have been outside of the South African tax net for many years. It is advisable to motivate your circumstances to the tax man, supply supporting documents such as a retrenchment letter. Also, obtain a Tax Residency Certificate from the foreign tax authority to prove you have been a non-tax resident in South Africa. 

The way forward for expats returning home

For those South Africans forced to return home temporarily following retrenchment or non-renewal of their employment contract abroad, there is room to maintain their non-tax residency status. However, for SA expatriates to avoidl tax challenges, it’s crucial to engage with tax professionals to ensure that proper tax status is maintained, especially when unexpected changes force them to return home.