Expats in these three island locations are easy targets for Sars

South African expatriates living in Guernsey, Jersey or the Isle of Man are under grave threat from the South African Revenue Service (Sars).

Tax Consulting South Africa’s cross-border taxation legal manager Thomas Lobban said residents in these so-called tax-haven countries are considered low-hanging fruit for the revenue collector.

“None of these jurisdictions has a tax treaty with South Africa, meaning expats who have not formally ceased their tax residency with Sars are legally obligated to declare and pay tax on their worldwide income,” said Lobban.

The net is closing

Over the last five years, Sars has upgraded its capabilities in detection, tracing and prosecuting non-compliant taxpayers abroad.

“This has been boosted by the global trend of information sharing and enforcement support between tax authorities, including those on the three isles,” explained Lobban.

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“Make no mistake; Sars knows you exist and where you are and may already be building a case against you with input from your local tax authority.”

Expats living on the isles are considered particularly vulnerable because, without a double tax agreement (DTA) to defend their foreign income, they could soon find themselves paying both local tax and outstanding South African tax.

But people who have financially emigrated from South Africa are in the clear.

Financial emigration

Every South African tax resident is required by law to pay tax on their worldwide income, regardless of where they reside on the planet.

And, unless they can objectively prove their intention to remain outside the country permanently, Sars will treat them as resident taxpayers.

Many expatriates are mistakenly under the impression that because they are no longer physically in the country, this releases them from their tax obligations.

“Sars doesn’t assume a taxpayer will never return just because they emigrated,” says Lobban.

“They must follow a formal cessation of tax residency process and provide objective evidence of the permanence of their departure, which is not assumed.”

How to stop South African tax residency

• The country you’ve emigrated to must share a double tax agreement with South Africa, which currently does not exist between South Africa and the isles.

• The physical presence test: This is generally reserved for foreign nationals who were already only temporarily tax residents in South Africa (i.e: not applicable to South African nationals generally)

• Financial emigration: a formal evidence-based process to change a taxpayer’s residency status.

Only the last option is available to expatriates based in Guernsey, Jersey or the Isle of Man.

“If you have not completed this process, you are most likely still a tax resident on Sars’ system,” says Lobban.

Also, if expats still have sources of income in South Africa, they will still need to declare that income and pay tax accordingly.

“However, anyone who did not financially emigrate may find themselves in a precarious position.

“While on the isles, if they accumulated wealth or have one or more sources of income and have not declared or paid tax on them to Sars, they may have built up a substantial tax debt over the years.”

There’s been a major increase in the recent number of offshore audits in recent years.

The audits have been described as invasive and distressing to taxpayers, as it delved deeply into the target’s private affairs.

“Once Sars has notified you of an audit into your financial interests, it is too late even to attempt to use the Voluntary Disclosure Programme for amnesty, as this is no longer seen as a voluntary step,” said Lobban.

“Expatriate taxpayers who thought they were in the clear are now either being notified of an audit or, in other cases, are being automatically assessed by Sars based on incorrect information, which places them even more at risk down the line.”

Sars will also deny any attempt to emigrate until a taxpayer is compliant and their account is settled financially.

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