International taxation deals with the tax consequences that arise when individuals, businesses, income or transactions have connections with more than one country.
South Africa’s international tax system operates through domestic tax legislation together with double taxation agreements and other international arrangements.
Tax Residence
Tax residence is fundamental to international taxation.
South African tax residents are generally subject to South African tax on worldwide income, while non-residents are generally taxed on income from South African sources, subject to applicable exemptions and double taxation agreements.
Different rules determine the residence of individuals and companies.
Source of Income
Where income arises can determine whether South Africa has a right to tax it.
Source rules differ according to the nature of the income and may apply differently to employment income, business profits, interest, royalties, capital gains and other forms of income.
Double Taxation
The same income can potentially be subject to tax in more than one country.
South Africa has entered into double taxation agreements with numerous countries to allocate taxing rights and provide mechanisms for relieving double taxation.
Relief may also be available through foreign tax credits under domestic tax law.
Double Taxation Agreements
A double taxation agreement, commonly called a DTA or tax treaty, establishes rules governing taxation between the countries that are parties to the agreement.
DTAs commonly address residence, permanent establishments, business profits, employment income, dividends, interest, royalties and capital gains.
A tax treaty does not normally create a tax where no tax liability exists under domestic law. It generally limits or allocates taxing rights that would otherwise arise.
Permanent Establishment
A foreign business may become subject to tax in another country where its activities create a permanent establishment there.
The meaning of permanent establishment depends on the applicable tax treaty and domestic law.
Typical issues include fixed places of business, branches, offices, construction activities and certain activities conducted through agents.
Foreign Income
South African residents may be required to declare income earned outside South Africa.
This can include foreign employment income, business income, rental income, interest, dividends and capital gains.
Exemptions and foreign tax credits may reduce or eliminate South African tax in particular circumstances.
Withholding Taxes
Certain cross-border payments may be subject to withholding tax.
South African withholding tax provisions can apply to particular payments such as dividends, interest and royalties made to non-residents.
The applicable rate may be reduced by a double taxation agreement.
Transfer Pricing
Transactions between connected parties in different countries may be subject to transfer pricing rules.
These rules generally seek to ensure that cross-border transactions between related parties are priced on terms comparable with those that would apply between independent parties.
Controlled Foreign Companies
South Africa has controlled foreign company rules that may attribute certain income of foreign companies to qualifying South African residents.
These provisions are intended to address circumstances in which income is earned through foreign entities controlled by South African residents.
Individuals Leaving or Entering South Africa
Moving between countries can have significant tax consequences.
Tax residence does not necessarily begin or end simply because a person enters or leaves South Africa. The person’s circumstances and the applicable residence rules must be considered.
A change in tax residence may also have capital gains tax and reporting consequences.
International Businesses
Businesses operating internationally may encounter taxation based on residence, source, permanent establishments and the location of their activities.
Cross-border operations can also involve transfer pricing, withholding taxes, foreign tax credits, VAT and reporting requirements.
International Tax Cooperation
South Africa participates in international arrangements concerning tax treaties, exchange of information, transparency and measures dealing with cross-border tax avoidance.
International tax rules continue to develop as economies and businesses become increasingly interconnected.
Official Information
International taxation can be particularly complex, and the treatment of a transaction may depend on both South African law and the law of another country.
Current requirements should therefore be confirmed from SARS, applicable legislation and the relevant double taxation agreement.