The members of the Committee were again cautioned that this amendment will be detrimental to a population of taxpayers that feel alienated by recent fiscal amendments and this proposal may see a further surge in taxpayers cutting their ties with South Africa.
Beyond the fact that it may severely harm our tax base, commentators raised several technical impediments that stand in the way of the proposal:
- If the proposal is enacted, it would constitute South Africa’s first double tax treaty (DTA) override. The proposed tax is configured to circumvent DTAs that give foreign countries the sole right to tax pensions and similar amounts once the taxpayer has emigrated from South Africa to a new country of residence.
- The tax will result in double taxation, specifically where it is at cross-purposes with the provisions of a DTA. The reason for this is simply that the foreign country will not be required to grant a tax credit where the retirement interest is taxed in South Africa (when the taxpayer ceases residency) and again upon withdrawal (when the taxpayer is resident of their new country of residence). This leaves the taxpayer with no relief in either country.
- Overriding international treaties is a matter of some gravity. Once a DTA is published in the Government Gazette it becomes part of South African law; it is subsumed under our Income Tax Act. Therefore, where a provision that overrides the treaty is enacted, it contravenes the Income Tax Act itself.
- Violating treaty obligations signals a fundamental deviation from a long-standing policy to respect our agreements with treaty partners. It creates a grim precedent and it, in turn, violates our good faith obligations prescribed by the Vienna Convention on the Law of Treaties.
- Beyond these aspects, it is clear that the tax will be exceedingly distortive, where tax is imposed at unknown rates on an amount that will differ from the amount that will eventually be paid to the taxpayer. In addition, the taxpayer will be forced to incur interest on the tax, which is a direct result of Government’s decision to impose a three-year lock-in of retirement interests after cessation of residency. The tax is inherently contrived, and it stands in contrast with the established principles that underlie our tax system.
These were only some of the items raised in opposition of the proposal but the take-away is that the intended tax is flawed in several respects. One of the Committee members noted that the proposal appears to be a desperate attempt to drum up additional revenue and called on National Treasury and SARS to address the concerns raised during the parliamentary hearings. It remains to be seen if National Treasury and SARS will persist with the proposal but the engagement in the parliamentary hearings again demonstrate the importance of a transparent and participatory legislative process.