The South African Tax Service (Sars) has recently started sending letters to taxpayers working abroad, confirming their change of status to non-residents for tax purposes. This is a somewhat peculiar development for expats who have previously ceased their tax residency, as they now require an additional step to objectively support their non-residence issued directly by Sars.
Read: Sars is now issuing letters confirming non-residency
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As some contributors have found, this is not as simple as simply contacting Sars and requesting the letter. Sars first verifies one’s status and then only issues the letter of non-residence. The supporting documents and clarifications requested by the Sars are onerous, at least nine points in total, and range from a motivation letter that sets out the facts and circumstances in support of the taxpayer’s declaration of non-residence, to granular details. your social interests (for example, if you still have a gym contract in South Africa).
Are we seeing Sars’s expatriate Trojan horse?
Interestingly, a taxpayer will request the letter to confirm their non-resident status, so as not to cease their tax residence in South Africa; This is a separate prior statement made to Sars. In other words, this means that a taxpayer who has already gone through the onerous process of proving their non-residency in the Sars must further agree to satisfy the same burden of proof when requesting the Sars letter to confirm this status. Indeed, non-resident taxpayers are subject to these audits even after ceasing to reside.
Sars’s decision not to issue the letter at the request of a taxpayer is indicative of the fact that the taxpayer cannot prove that he is not a tax resident in South Africa. This places the taxpayer in a precarious position and raises the question of whether it effectively overrides any process that the taxpayer has previously undertaken to cease their tax residence in South Africa (if any). As an added blow to these taxpayers, this Sars decision is not enforced in an assessment, which means that it cannot be challenged under the normal dispute process.
The past returns to haunt expats who followed questionable advice
Consequently, non-resident taxpayers should think twice before proceeding to request this letter from Sars. The Sars’ request for additional verification, before a non-resident letter is issued, shows that the Sars is seriously considering whether a prior declaration of non-residence was made and accepted correctly in each case. This does not bode well for those who improperly declared cessation of tax residence or who have been assisted by careless tax advisers who incorrectly declared non-residence.
Therefore, it appears that Sars, aware of the disturbing practices of tax advisers regarding tax residency for expatriates to date, has put these additional steps in place as an additional audit cushion. When the taxpayer did not effectively meet the non-residence requirements when the previous declaration was made, this will be found out after a request for a letter of non-residence is filed.
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It would be wise to view Sars’s non-residency letter application process in carrot and stick terms. While the letter (which can be relied on indefinitely) is a definite draw for nonresident taxpayers, it also carries the potential for any prior declaration of non-residency to be undone. A diligent taxpayer will seek the advice of a competent advisor, preferably with a strong legal component, to determine how to apply for a letter of non-residency and to guide you through the process.
Thomas Lobban is Cross Border Tax Legal Manager at Tax Consulting South Africa