The working class of South Africa are under pressure and for many of them, the situation in the country is not helping either. The economy is but a shadow of what it used to be and many believe that won’t change for the better any time soon, if ever.
With all the corruption and misspent tax money, it shouldn’t come as a surprise that those who have the means to emigrate are acting on those impulses more and more. After all, it is their tax money that is footing the bill for all the issues.
The new laws
Speaking of those who have the means to leave the country, new laws have been implemented that make their foreign investments and trusts taxable.
Previously, tax residents who had shares in foreign companies didn’t have to pay any tax on dividend and capital distributions. However, the new laws will require South Africans with a large offshore asset base to pay a maximum of 20% tax when repatriating their assets or capital distributions.
In an effort to boost the South African economy and be more internationally tax-competitive, the country allowed for a “participation exemption” in 2002. In short, this meant that when a South African tax resident owned any offshore company shares, he or she would be exempt from paying tax on dividend and capital distributions.
In European and British legislature, participation exemption was allowed to encourage their tax residents to repatriate the foreign income that they received. However, in countries like the US, any foreign income that came from foreign sources were taxed.
This led to investors keeping their money out of the country for longer periods of time, or until it became financially viable to repatriate.
SA followed in the European footsteps in 2002, but that honeymoon period is now over and the taxman wants his cut.
The issue of tax avoidance
If anything, South Africans know how to hide their money well and this has been one of the main reasons for the push for the new tax laws. Their offshore trusts were seen by the South African Revenue Service as a way to avoid paying tax.
However, the other side of the coin is often missed and that is the opportunity that participation exemption provides. The individuals who have the means to invest offshore are also the ones who embark on new ventures and create job opportunities that the country desperately needs.
It would seem that the new laws are aimed the very people who are creating opportunities. In the process, these individuals begin to feel as if they are being milked and decide to join their assets, rather than repatriating.
So, who is affected?
The super-rich aren’t too phased about the laws because in general, they never intended for their money to make it to South Africa, to begin with. Those who had plans of leaving the country in any way also don’t mind the new laws. They are all too happy to keep on building their expatriate funds.
On the other hand, the lower income individuals will feel as if they are being done in. They are the ones who will lose all the way because they never intended to keep their investments out of the country. In fact, they rely on their capital growth to make it in South Africa, but the new laws might just be the shove they need to decide to leave.
It seems like a penny wise, pound foolish situation. Sure, South Africa might get a couple of Rand from repatriation now, but in the end, they will lose the very tax base that is responsible for a large amount of foreign income.