A critical analysis of the proposed exit tax on retirement funds in South Africa

Abstract

The South African retirement fund tax regime follows the exempt, exempt, taxed system. Under this system, retirement fund contributions and growth are exempt from tax. Tax will only be levied on the retirement fund benefit once the individual receives it. If an individual ceases to be a South African tax resident and becomes a tax resident of another country before retirement, South Africa may lose their taxing right on the retirement fund benefit. This is due to the provisions of certain double tax agreements, which grant the sole taxing right on retirement fund benefits to the residency country. To address this, the National Treasury proposed to levy an exit tax on retirement fund benefits for individuals ceasing their South African tax residency. However, the proposal was withdrawn from the legislative cycle due to concerns raised on various issues, such as double taxation and the override of the double taxation agreement. The National Treasury noted that the proposal will be reworked to address these comments and reintroduced into a future legislative cycle. However, this has not yet occurred. This mini-dissertation aimed to critically analyse the potential tax implications of the proposed introduction of an exit tax on retirement funds of emigrating individuals in South Africa and compare it to the laws of the United States of America (USA) and the international practices of the Organisation for Economic Co-operation and Development (OECD) to find possible recommendations for South Africa's anticipated legislation. The study made use of the qualitative research methodology. Specifically, doctrinal legal research, comparative legal research, and critical analysis were used. In this study, it was found that the exit tax that is proposed in South Africa does not differ much from the exit tax that is in place in the USA. The primary difference is that the USA has concluded certain double tax agreements to allow for the taxation of former residency as if the double tax agreement was not entered into. On the other hand, the double tax agreements concluded by South Africa do not include such a saving clause. It was also found that the OECD's Model Tax Convention allocates the taxing right on retirement funds to the residence country. This is the view followed in most of the double tax agreements concluded by South Africa. The OECD, however, offers alternative provisions to the sole country of residence, which South Africa could consider. Considering the above, for the proposed exit tax to work, South Africa would need to renegotiate the double tax agreements entered into with other countries to allow for exclusive or limited source taxation on retirement fund benefits.