A combination of a source-based and residence-based tax system for income earned outside South Africa is being proposed by the Katz Commission as one of a number of steps necessitated by the easing of exchange controls.
According to Beric Croome, tax partner at Kessel Feinstein and vice-chairman of the Sacob tax committee, the residence-based system takes into account where you live. The source-based system considers where the activities giving rise to the income occur.
The Katz Commission is proposing to tax "active" income from foreign activities on a source basis, and "passive" income from investments abroadon a residence or worldwide basis.
For example, a South African company with a branch in Botswana might deposit funds generated from trading in a bank account in Botswana on which it earns interest.
If a source-based tax system is used, the income is taxed under Botswana's regime because that is where the activity giving rise to this money is conducted. But an individual or a business residing in South Africa and placing funds generated in South Africa on deposit in Botswana, would be taxed under the South African system in terms of residence-based tax.
In the first example, the tax levied also depends on whether there is a double taxation agreement (DTA) between Botswana and South Africa.
If there is a DTA you will only be taxed by Botswana. If there is no DTA, you could theoretically be taxed both by Botswana and South Africa, but you will be credited for tax paid in the other country.
Once exchange controls are fully abolished, individuals will not be able to invest offshore without taking into account the tax position in South Africa.
The rules are being reviewed because under the present system, if exchange controls were lifted, the government could not tax income sourced elsewhere even if the recipient was living in South Africa.