Foreign Tax Clearance
South Africa has faced many challenges over the past year such as the political environment, electricity crises, unemployment, etc. This has resulted in many individuals seeking to invest in other economies and the requirement for a foreign tax clearance certificate. We therefore deemed it fit to write an article about these applications as well as to assist those who require this specific service.
To clarify, there are various tax clearances that could be applied for such as a tax clearance of good standing, for immigration and then the one this article deals with, a foreign tax clearance certificate.
Firstly, an individual may make offshore investments of up to R1 000 000 during a tax period without a foreign tax clearance by simply approaching a financial institution which would manage the investment which includes the process from the initial transfer and ending with the purchase of a foreign investment asset. If a person is married, each individual would qualify but the necessary documents need to be completed to register the donation with SARS. (Also, anti avoidance provisions may apply)
Once an investment in excess of R1 million is to be made by an individual, a foreign tax clearance needs to be obtained from SARS and given to the financial institution before the transaction could be completed. Once an application has been submitted to SARS properly, the approval should take 5 working days. In our experience, the application is generally completed within this turnaround time. (Although it may take longer around public holidays such as Easter and Christmas)
The following documents are required when applying for a foreign tax clearance:
- Proof of funds – Before an application could be granted, a person must demonstrate that they have the funds. One can therefore only apply for funds the taxpayer has and not for a larger amount. If more than one investment is made in a tax period, multiple foreign tax clearance applications could be made and granted by SARS. A clearance is valid for a period of 12 months from the date of issue. Should the investment not be completed within this time limit, a new application must be done. The source of the funds should also be disclosed (Such as a donation, inheritance, savings with supporting documents)
- Good standing with SARS – In order for a foreign tax clearance to be approved, all past returns must be up to date as well as the account must be in good order. In other words, a foreign investment cannot be made when a taxpayer owes SARS money or any outstanding returns. SARS may and will decline a request. Need assistance with your personal income tax returns.
- A statement of all assets and liabilities – This would include both local and foreign assets and liabilities and must be for the last 3 years. This should show all fixed property, cash and cash equivalents (such as shares) loans, vehicles, etc. as well as all amounts owing such as credit cards, mortgage, etc.
- Information as to where funds will be invested – This includes letters form brokers, banks, etc.
- Information with regards to the last 3 returns filed – This includes schedules of interest earned, capital gains, etc.
Once a taxpayer involves themselves with the worldwide economy, we recommend the use of a tax practitioner that understands concepts such as a residency-based tax systems, deemed residents and Section 6quat credits for taxes paid to the foreign tax authorities.
We furthermore recommend this treatment as the foreign investment would generally earn income that may be taxable in South Africa less the credits paid to the foreign tax authorities. Foreign interest earned in an individual’s capacity is taxable from the first rand while taxes paid to the foreign tax authorities may be claimed as a credit in our country. A similar situation is true with regards to dividends. The foreign country may impose a withholding tax that is less than 20% and any deficit would be subject to taxes in South Africa should a person be a resident or deemed resident of South Africa.
Tax practitioners should be familiar with these technicalities and would draw up schedules in accordance with these requirements.
In many cases, the fees paid to a tax practitioner / accountant would qualify as a deduction against taxable foreign income., effectively returning up to 45% of the fees so paid in the subsequent year.
Kindly note: This service is only currently available to existing clients.