An international comparison of the South African tax treatment of cross-border retirement fund payments

Abstract

South Africa adopted the residence tax base in 2001, which means that residents are taxed on worldwide income and non-residents are taxed on South African source income. With cross-border retirement benefits, South Africa deviates from this tax base, since it provides relief to residents for foreign retirement benefits, which can lead to South Africa losing tax revenue on this income. This mini-dissertation had the aim to compare the South African tax treatment relating to cross-border retirement benefits with those of international policies, such as the policies from Model Tax Conventions and tax treatment of overseas countries’ tax legislation. The South African tax system has seen many changes, especially when it comes to the cross-border retirement benefits. South Africa taxes residents on retirement benefits, but provides an exemption for foreign retirement benefits. Non-residents are taxed based on the location of the services rendered as well as the payment being made from a South African fund. This indicates that for retirement benefits, South African tax legislation deviates from the residence based principle of taxation, especially for residents since they are only taxed on South African sourced retirement benefits. A comparison should be done on how the current South African tax treatment of cross-border retirement benefits compare to those of other comparable countries and international practice. The OECD has the preferred view that the country of residence should have the taxing right, which shows that South Africa’s tax treatment is not entirely in line with the OECD, since residents are not taxed on receipts from foreign funds. The United Nations, however, prefers that the source country should have the taxing right and South Africa’s tax treatment is more in line with the United Nations’ view, since it taxes residents and non-residents when the retirement benefit is from a South African source. When compared to other countries, South Africa has a more lenient tax treatment for residents, giving them exemption for foreign retirement benefits, where other countries aim to tax their residents on the foreign retirement benefits, which indicates the research problem that South Africa deviates from the residence-based tax principle. South Africa has a source based tax treatment for non-residents, taxing them on retirement benefits when the services were rendered in South Africa, and when the fund is located in South Africa. Other countries aim to only tax non-residents when a fund in that country pays the benefit or not to tax non-residents at all. All of these tax treatments are subject to specific double tax agreements. It is clear that South Africa has a unique tax system when it comes to cross-border retirement benefits, where only certain elements of the tax treatment were comparable to international trends and practices. The main differences are that South Africa does not aim to allow the country of residence to have the sole taxing right over retirement benefits, since it does not tax residents on worldwide retirement benefits. South Africa provides relief to its residents for foreign retirement benefits and specifically looks at the services rendered in South Africa for non-residents. Because of the lenience towards residents, South Africa is losing tax revenue which can be problematic for the fiscus. The current tax position in South Africa was compared to international trends, however was found to not be closely aligned to the OECD’s preferred view, but rather to the United Nations’ view. A conclusion was drawn that South African tax legislation should be amended to tax cross-border retirement benefits in order to be aligned with the residence-based principle