Question NW34 to the Minister of Finance
31 July 2024 - NW34
Mkhwebane, Adv BJ to ask the Minister of Finance
(1) (a) How is the cost-of-living allowance for diplomats representing the Republic in foreign missions currently taxed and (b) what factors are considered in determining the taxation of cost-of-living allowances for diplomats; (2) whether there are any specific guidelines and/or regulations put in place regarding the taxation of cost-of-living allowances for diplomats; if not, why not; if so, how does the taxation of cost-of-living allowances for diplomats differ from that of other employees?
Reply:
(1)(a) Cost-of-living allowances for diplomats are exempt from income tax, as provided for in section 8(1)(a)(iv) of the Income Tax Act, 1962.
(b) The taxability of the allowances was reviewed in 2001 and it was decided to tax the previously exempt allowances. However, based on representations by the Department of International Relations and Cooperation (DIRCO) following the introduction of the residence basis of taxation, it was decided to restore the exemption in the Revenue Laws Amendment Act, 2002. The taxation of the allowances was reviewed again in 2012 and the exemption was maintained in the Taxation Laws Amendment Act, 2012.
The amounts of the allowances are determined by the Minister of Public Service and Administration (in a Foreign Service Dispensation), after consultation with DIRCO. It is important to note that the allowances are funded by tax revenue. If the quantum of the allowances were to be reduced by taxation and it were necessary for a diplomat to incur higher costs in a specific country to maintain a specified standard of living in that country, the shortfall would need to be funded by way of an additional budget allocation from tax revenue by National Treasury to DIRCO.
(2) The taxation of the allowances is governed by the provisions of the Income Tax Act, 1962, as noted above. In terms of international law, diplomats on assignment in other countries are only subject to taxation on their remuneration in their home countries. Similarly, double taxation agreements provide that civil servants on assignment in other countries are generally only taxable on their remuneration in their home countries. Accordingly, cost-of-living allowances for civil servants are also exempt from income tax, as provided for in section 8(1)(a)(iv) of the Income Tax Act, 1962.
Employees in the private sector, on the other hand, may be taxed on their remuneration in both their home countries and the foreign countries in which they work. In order to simplify issues around double taxation relief and cater for cost-of-living allowances, which form part of remuneration for private sector employees, section 10(1)(o)(ii) of the Income Tax Act, 1962, provides for the exemption of up to R1.25 million of remuneration a year for work outside South Africa. The section requires that the employee be outside South Africa for at least 183 full days in total in any period of twelve months of which more than 60 days must be continuous.