Tax Residency Certificates: The Contentious Debate Amongst Expat Tax Advisors - Cease Tax Residency
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For years the South African Revenue Service (“SARS”) has been trying to amend legislation to affect the way that expatriates are taxed on their foreign earnings. Their relentless pursuit for tax compliance often directs them towards individuals who are not disclosing all their earnings.

Recently SARS began requesting audits of those working offshore with more frequency, especially at the point when expatriates apply for tax relief under a Double Taxation Agreement (“DTA”) or attempt to do a financial emigration.

Obtaining a tax residency certificate (“TRC”) is usually the first step in claiming relief under a DTA . However, many tax advisors skip over this step. Their motivation is that it holds little reward for tax consultants or advisors to assist taxpayers in getting this certificate, but that is not entirely true.

What is a Tax Residency Certificate?

From 1 March 2001, South Africa went from a source-based taxation system to residence-based taxation. This means that a South African tax resident’s worldwide income is subject to tax in SA, unless the individual either applies for exemption using section 10 (1)(o)(ii) of the Income Tax Act, or relief. On the other hand,  tax non-residents are only taxed on their South African-sourced income

The only way to ascertain which country a person is a tax resident of, is to see if they meet the residency tests for that tax jurisdiction  and then to apply for a TRC. According to SARS, a confirmation of tax residency can be obtained in two ways:

  1. Through an application to the foreign country where the services are rendered or the income is derived; or
  2. South African residents can request the issuance of a certificate of residence from SARS

Why should you apply for a Tax Residency Certificate?

Because the onus of proof always rests on the individual, a TRC serves as the surest way to prove your tax residency status to your employers or the revenue authority who is expecting you to pay tax on the income generated.

When applying for relief under a DTA, it must first be determined which country holds the right to tax you on your earnings. A certificate of residence will help provide clarity about this matter during the DTA application process.

Misconceptions about a certificate of residence

The biggest mistake that expatriates make is to think that they are automatically seen as a tax resident or a tax non-resident of a particular country. At no point is residency an automatic process, nor does your work permit alone suffice as a proof of residence – the legal requirements must always be met.

A South African tax advisor is not competent enough to advise clients that they are tax residents in another country, unless they are independently qualified to give advice in that country as well.

One way to legitimise a tax residency certificate issued by the revenue authority of a foreign country, is by asking SARS to stamp the residence application form. Once SARS has accepted your position as a tax resident in another jurisdiction, you can apply for relief under the DTA agreement between the two countries.

With the focus on overall tax compliance, it is best to ensure that you have a clear understanding of which jurisdiction you are resident in. A tax specialist can help determine whether you were ‘ordinarily’ resident for that income year, or whether you met the ‘physically’ present criteria for a resident. They can further advise on how to obtain a tax residency certificate for the purposes of applying for tax relief under a DTA.

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