We’ve entered an era where disclosure of foreign income to the taxman, is trending.
In 1776, Adam Smith a Scottish philosopher and economist, wrote An Inquiry into the Nature and Causes of the Wealth of Nations and stated that, “There is no art which one government sooner learns of another than that of draining money from the pockets of the people.”
Over the past decade we’ve witnessed radical changes in tax legislation around the world, spearheaded by tax policy reforms and continued efforts to fight against international tax avoidance and evasion, orchestrated by the Organisation for Economic Co-operation and Development (OECD).
Gone are the days where you could secretly move part of your savings or business profits into a cross-border account or tax-haven investment and not report it in your tax return.
So, what are the implications of earning income offshore?
Often the term “international tax” is used but it is actually a misnomer. There is no one global taxing body, nor is there one set of international tax laws, applicable to all countries. The term “international tax” actually refers to the international aspects of each country’s domestic tax laws.
Each country has its own domestic tax laws and to avoid double taxation, countries enter into double tax agreements also known as treaties, with one another. This is to avoid the imposition of tax in two or more states on the same taxpayer and on the same income. Such agreements and also the domestic tax laws of a country contain measures of tax relief in one country in the event of tax that has already been raised by the country of source.
The source country normally has the right to tax business profits, interest, dividends, royalties, directors’ fees, rental income, remuneration, capital gains and pensions earned in that country by foreigners or non-residents to that country.
Most countries today, including South Africa, follow a residence basis for the imposition of taxation.
Worldwide, residence in a country is normally the yardstick for raising a tax of that state, and residence for treaty purposes involves considering the domestic law of residence for tax purposes.
The term “resident” for Income Tax purposes in South Africa is defined in the Act and means a person who is ordinarily resident with the intention to live in South Africa for a significant period or physically present for a specified period. In other words, it means being his or her real home, the most fixed and settled residence with some degree of continuity. A company or trust in turn is resident where it has been formed or incorporated or where it has its place of effective management.
From 1 January 2001 South African tax residents are taxable on their worldwide income, regardless of the source of the income. The result is that being tax resident in South Africa, you will be taxed on all income earned in South Africa as well as income that originates in other countries, albeit with tax relief in certain circumstances.
How do tax authorities curb tax avoidance and evasion?
The Global Forum, an OECD international conference, now has 153 member-states that includes former so-called tax-havens and is the premier international body for ensuring the implementation of the internationally agreed standards of transparency and exchange of information in the global tax arena. A multilateral framework within which work on exchange of information for tax purposes has been carried out by both the OECD and non-OECD countries in recent years.
The Forum’s ultimate objective is to achieve a smooth global flow of the information required by tax authorities. Reality is that data collected by financial institutions around the world are being reported to tax authorities and the exchange of this information is to ensure that everyone pays the right amount of tax.
If in doubt, contact a registered Tax Practitioner at your nearest Tax Shop to assist.