We’ve recently had the pleasure of making a trip to Dubai to meet the expat community there to discuss the recent tax changes in South Africa and how they affect South African expats. It’s been great to meet some fellow South Africans in this hub of all expat hubs. These are the key insights I’ve gained from my time there this week.
Residency rules and the proposed taxation of expats
The expats we spoke to in Dubai were simply unaware of the nuances of the residency rules and treaty residence and how these affect the new tax changes. In both cases the rules are principle based and therefore we get our guidance from case law.
This is a specialist area and the drafted legislation changes to Section 10 of the income tax act (in order to remove double non-taxation) require South Africans abroad in low tax jurisdictions to ensure they have clarified their residency position with SARS. If this is not done, expats could face an ongoing potential liability to tax in South Africa. Now that Common Reporting Standards (CRS) are in force, keeping a low profile on these issues (the old approach) simply won’t work going forward.
The opportunity cost of cash
We call this the classic expat problem – sitting on cash. Expats abroad are often unsure of their final destination (or sometimes even the next destination). The result is an understandable lack of action on all areas of financial planning. If you aren’t sure what to do it’s not surprising that nothing gets done.
Plans change, but it’s better to work from a plan with a number of moving parts than no plan at all. And there are perfectly feasible offshore investment options that are tax efficient for multiple locations, that do have flexibility and that don’t cost an arm and a leg. When the MSCI moves up by 112% (like it has over the last five years alone) the opportunity cost of holding cash is laid bare.
Sharp adviser practices in the past in Dubai have made expats weary of all aspects of offshore investing and financial planning. To be fair, someone selling a single offshore product to any number of offshore expats is not really an adviser. He’s a product salesman.
Consequently, it seems many Dubai expats have been overly reliant on advisers and investments back home in South Africa. Often these products pay tax locally which is wholly inappropriate for a Dubai resident unlikely to return home. Where that’s not the case, the limited diversification options in the South African investment universe again render current arrangements not fit for purpose.
The South African stock market is 1% of the world market. The Rand is a global proxy for volatility (as seen in its relationship with the VIX index). What we are seeing is expats who think and act globally in regard to their incomes and businesses end up acting locally in terms of their own financial arrangements.
What’s missing here is a trusted relationship with a globally oriented financial planner operating in a regulated environment, but it’s going to take time to rebuild trust. Hopefully the wealth team here at Sable International will be able to assist expats along this journey.
For South Africans in search of a “plan B”, it’s easy to see why Dubai is a magnet. It’s the one place you can go when no other residency and citizenship options are available. It’s tax free yet is very expensive and is a global trading hub that is 80% expats. It’s open for business, safe and the sun shines - a bit too much perhaps! I see the Dubai and UAE South African expat community continuing to grow and prosper.
If you'd like any assistance with your international finances, or if you're thinking about moving abroad and would like to know what your investment options are, give us a call on +27 (0) 21 657 1540 or +44 (0) 20 7759 7519. You can also leave a comment below or send an email to firstname.lastname@example.org if you have any enquiries.
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