The South African Reserve Bank has decided to partially reverse new exchange control requirements for non-residents that would have required them to obtain Sars tax compliance approval for international income transfers, including dividends and interest income.
However, the relief will not apply to rental income and directors’ fees, which the Institute for International Tax and Finance said was unjustified and would continue to deter foreign investment and undermine South Africa’s competitiveness.
The Bank’s financial surveillance department last week issued revised guidance to the effect that non-resident entities will no longer be required to obtain an application for international transfer (AIT) tax compliance PIN from Sars for income transfers. Dividends from listed companies and interest from regulated financial institutions will be able to be transferred to non-resident individuals without requiring tax clearance.
“This is a positive development that addresses some of the most egregious aspects of the October changes,” said Institute for International Tax and Finance director Michael Kransdorff. “The Bank deserves credit for recognising the legitimate concerns raised by the investment community and for taking corrective action.”
Significant problems
However, Kransdorff said significant problems remained: under the revised framework, non-resident individuals would still have to obtain AITs from Sars in respect of certain categories of income, including rental income and directors’ and members’ fees.
“In addition, various categories of income now require tax compliance status (TCS) certificates of good standing from the South African payer, including dividends from unlisted companies, interest from unregulated entities, and trust distributions.
“The continued discrimination against rental income and directors’ fees is arbitrary, economically harmful, and administratively unjustifiable,” Kransdorff said. “Why should a non-resident earning rental income face weeks or months of bureaucratic delays in accessing funds, while a non-resident earning interest or consulting fees can remit income immediately? This distinction has no rational policy basis.”
With regard to directors’ fees, Kransdorff said PAYE was already withheld at source by the South African company, ensuring that Sars collected the tax before the funds were remitted.
“There is no additional tax risk to mitigate once PAYE [pay as you earn tax] has been withheld at source. This is pure bureaucracy serving no revenue protection purpose,” he said.
Kransdorff bemoaned the lack of a de minimis threshold for non-residents. South African residents benefited from a R1m annual single discretionary allowance that enables them to remit funds abroad without a Sars tax clearance. Non-residents should be accorded the same benefit; otherwise, a non-resident property investor earning R250,000 a year in rental income would face the same onerous AIT requirements as someone earning R2.5m
“Few peer jurisdictions impose clearance requirements on small, routine income flows to non-residents,” Kransdorff said.
The exclusion of rental income from the relief would harm thousands of South Africans who had emigrated but retained property in South Africa and relied on rental income to support themselves abroad, he added.
“This creates a structurally impossible situation. An emigrant receiving monthly rental income cannot access those funds for weeks while Sars processes the AIT. If they rely on that income for overseas living expenses, they face recurring cash-flow crises. The inevitable result will be forced asset disposals — exactly the opposite of what the South African economy needs,” Kransdorff said.
Kransdorff called for a streamlined AIT process: for amounts exceeding the R1m threshold but below R10m, Sars should commit to a maximum seven-day turnaround as well as simplified and proportionate supporting documentation requirements.
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