In the ever-evolving landscape of international financial regulations, transferring funds to tax non-residents of South Africa via the new Approved International Transfer (“AIT”) system can be a complex and laborious process. In this article, we will delve into the crucial requirements and step-by-step procedures for the transferring of funds/monies to individuals who have previously formally emigrated (prior to 1 March 2021) for both tax and exchange control purposes.
The old process
Before 1 March 2021 (for the tax years of assessment from 2002 to 2021), the formal emigration process entailed:
- completing the MP336 form, which was submitted to and approved by the South African Reserve Bank (“SARB”);
- disclosing the cessation of the individual’s South African tax residency to the South African Revenue Service (“SARS”) in the submission of their tax return; and
- submitting the necessary information (by way of the specific annual tax return) regarding the deemed disposal under section 9H of the Income Tax Act to SARS.
Before 1 October 2001, only the SARB process was in place and individuals were required to complete the MP336 at the time of formal emigration. If the individual was registered for tax, then the tax authority was informed of the formal emigration and a request for deregistration of income tax was submitted. This was a manual process.
The new process
From the 1st of March 2021, the whole process is now administered by SARS and the formal emigration process via SARB has fallen away. The process is initiated via eFiling by updating the individual’s “registered details”. A “notice of non-resident tax status” is issued by SARS after the successful completion of the process.
It is important to note that SARS has changed its process for natural persons to cease their tax residency multiple times since South Africa went over to a residency-based tax system in 2001. The most recent addition is that, since 1 March 2021, SARS issues the abovementioned letter via eFiling to verify non-resident tax status. This letter has become the most important supporting document in applying to remit funds abroad through the new AIT application,
A practical example (Poor Bob)
Let us consider an example to illustrate the complexity and the inconsistencies between the old and the new processes.
Bob Brown left South Africa in 1992, right after completing his tertiary studies. In 1992, South Africa still followed a source-based tax system before moving over to a residence-based tax system for individuals on 1 March 2001. A residence-based system means that tax residents are liable for paying tax on their worldwide income (excluding certain exemptions or exclusions) and non-residents are subject to paying tax on the income earned from a source within South Africa.
Bob never registered for tax in South Africa as there was no obligation to register with SARS under the source-based system. Whilst he was “Ordinarily Tax Resident” in South Africa until the date he left, he never had South African source income which would have been subject to tax in South Africa.
Bob followed the process required by SARB and completed and submitted the MP336 form to SARB via his authorised dealer, after which he received approval for his formal emigration (subject to certain conditions/restrictions).
Bob is a beneficiary of a South African trust.
The Trustees intend this year to distribute local dividend income (in excess of R10 million) to Bob, but this has become an administrative nightmare because of the prevailing administration of the process by SARS, the approval required by SARB and the banks having to “tick” all the tick boxes to process the transaction by way of the new AIT system.
How can Bob get the necessary approvals to externalise this distribution? Bob does not have the essential “notice of non-resident tax status”. It is also unlikely that SARS will issue a manual “notice of non-resident tax status” to Bob. Without this notice, the banks will not process the remittance of funds abroad.
Bob is now required to submit a brand new ceasing of tax residency application, resulting in unnecessary compliance fees, administration, and enquiries from SARS. Even though this has previously been done and, in most instances, the tax non-residency status is listed on eFiling under the individual’s “registered details”.
Now Bob needs to (pay one or more professionals) follow an onerous minefield of unnecessary steps for the banks to finally remit the distribution to him overseas.
Step 1: Obtain a current South African Tax Reference Number
Before any funds can be remitted abroad, Bob must apply for a current tax reference number as a beneficiary receiving a distribution from a local trust. This number is essential for legal compliance and seamless fund transfers. Certain supporting information needs to be sourced and a virtual appointment must be arranged with SARS to process the new tax reference number or tore-activate an old or previously deregistered tax reference number and obtain access to eFiling.
Step 2: Obtain a Notice of Non-Residence Tax Status letter
After securing the tax reference number, the next step is to inform SARS of the taxpayer’s non-residency status and obtain a confirmation letter from SARS verifying this. Several documents and forms need to be completed and submitted to receive the “notice of non-resident tax status” letter.
Step 3: Obtain an AIT Pin
The final step involves applying for an AIT Pin to remit funds abroad. Several supporting documents are required to accompany the AIT application, most importantly:
- Proof that the taxpayer has ceased to be a tax resident in South Africa. The essential “notice of non-resident tax status” letter.
- Proof of payment of the Section 9(H) exit taxes.
Was this the intention of the authorities?
If we look at the sad position in which a significant number of former residents find themselves when it comes to trying to take money out of South Africa, we must ask:
- Was the current process the intention of SARB and SARS when they implemented the changes?
- Were the previous processes put in place by SARB and SARS meaningless?
- Alternatively, are the banks confused about the requirements and are they imposing unnecessary requirements in demanding these supporting documents?
Either way, SARB needs to clear it up – and if necessary, update and simplify this process.
How can the SARB and SARS streamline the process?
1. Formal emigration before 1 March 2001.
We propose a more streamlined approach, requiring only the following supporting documentation in cases where formal emigration was previously approved by the SARB:
- A tax residency certificate from the country of tax residence.
- A copy of the MP336 form and the previous approval received from SARB.
- Any additional requirements tailored to the specific circumstances. For instance, if a distribution is made from a local trust, a Tax Compliance Status (TCS) PIN may be mandatory for the trust to demonstrate its good standing.
2. Emigrations processed between 1 October 2001 and the present.
SARS already possesses the necessary information when an individual has ceased their tax residency. We propose that a simplified process could entail the following steps:
- Eliminating the requirement for the “notice of non-resident tax status” letter, as individuals who have already emigrated may have lost access to eFiling and cannot retrieve this document.
- Implementing a verification mechanism on the SARS website, as not everyone has access to eFiling, where SARS can issue a PIN, like the TCS good standing PIN, to attest that the non-resident has correctly followed the prescribed procedures and that SARS acknowledges their tax non-residency.
- The issuance of this PIN would facilitate real-time compliance monitoring about tax non-residency status.
The process of remitting funds abroad to tax non-residents via the new AIT system in South Africa has become increasingly complex and challenging. The transition from the old process has created confusion, layers of complexity and unnecessary complications for individuals who had previously emigrated for tax and exchange control purposes. It has become increasingly apparent that there is a disconnect between SARB, SARS and financial institutions in implementing these changes, leading to further confusion and inefficiencies.
Clarity, consistency, and collaboration between regulatory authorities and financial institutions are essential to alleviate the challenges faced by individuals navigating the AIT system in these challenging times.
To address these challenges, it is suggested that SARB and SARS consider streamlining the processes for emigrated individuals which will ultimately benefit these institutions due to less unnecessary work needing to be done by them whilst also simplifying the processes for the applicants – with no adverse implications for revenue due to SARS.
Authors: Michelle Tickner and Annalise Heydenrych