A “significant” proposed change to South African tax legislation may bring foreign employers into the South African tax net. The effect of the proposed amendment is that foreign employers will be required to withhold employees’ taxes.
Currently, only resident employers or a representative employer is required to withhold Pay-As-You-Earn (PAYE) and pay it to the South African Revenue Service (Sars) and pay Unemployment Insurance Fund (UIF) contributions and the Skills Development Levy (SDL).
Therefore, a foreign employer that has no presence in South Africa can legally circumvent these obligations in the Income Tax Act merely by not appointing a representative employer, explains Jean-Louis Nel, tax director at Van Huyssteens Commercial Attorneys.
The 2023 draft Tax Administration Laws Amendment Bill published at the end of July proposes to amend the legislation by removing the requirement that the employer should be a resident and omits the words “who is a resident” from the Act. The effect is that any employer will be required to withhold PAYE, Nel says.
An “employer” is widely defined as any person who pays or is liable to pay to any person any amount by way of remuneration.
Level playing fields
Joon Chong, tax partner at Webber Wentzel, says the objective of the proposed amendment is to impose the same payroll tax obligations on non-resident employers as are currently imposed on resident employers.
In addition, any agent with the authority to pay remuneration on behalf of a non-resident employer will also be required to register as an “employer” with Sars. This, says National Treasury, will level the playing fields between resident and non-resident employers.
While bringing much-needed clarity to this area of employment tax law, the proposed change will have far-reaching consequences for all foreign employers that currently pay or are liable to pay South African taxable renumeration to their assignees who render services in South Africa or foreign jurisdictions, says Anthea Scholtz, partner at Deloitte who specialises in global mobility taxation.
“The change will also apply to all remote work arrangements, inside and outside South Africa, where the foreign employer pays or is liable to pay South African taxable remuneration to an assignee. It will also affect the current provisional taxpayer status of the assignees,” she says.
Different strokes
According to Chong, many revenue authorities globally usually require an additional provision, such as a “fixed place”, “taxable presence”, or “permanent establishment” of the foreign employer in their countries before the foreign employer is required to register as an “employer” in their countries.
“If the individual’s presence in another country is ancillary to the work done, and the work could equally be done anywhere in the world, and there is no other taxable presence of the foreign employer in that country, then the revenue authority in that country will not require the foreign employer to register as an employer in that country.”
There are exceptions to the rule. Some countries will require foreign employers to register as an employer if they are an “employer” under the tax rules of their countries, despite not having any tax presence.
The practicality of it all
Chong remarks that unless the foreign employer registers for income tax separately, the foreign employer will not have a Sars income tax registration number.
“A foreign employer may also not have a CIPC (Companies and Intellectual Property Commission) number, as it is not a company but a foreign trust, partnership, or foundation. We anticipate that the foreign employer should then not be required to provide a CIPC number by Sars in this situation, as it is not an external company.”
She adds that the foreign employer may also not have a South African bank account. Sars accepts foreign bank accounts when foreign suppliers and intermediaries of “electronic services” register for VAT.
“Perhaps a similar concession will be available for foreign employers in the proposed alignment, and Sars will accept foreign bank accounts for a foreign entity to register as an employer,” Chong says.
The rationale
Ronny Levitan, head of global payroll and human resources platform Deel, questions the rationale behind the change.
“We welcome any legislation that cracks down on the non-payment of taxes, but we question moves that may negatively impact the ability for remote workers who earn in foreign currencies to live and work in South Africa,” Levitan says.
Darren Britz, head of tax, and Bronwyn Human, tax attorney at Tax Consulting, warn that the proposed amendment may lead to foreign employers prematurely terminating employment contracts and turning away from South Africa as a skills location altogether.
They believe it will place an additional burden on foreign employers. They will now have to:
- implement payroll systems;
- register for PAYE, UIF and SDL;
- register a branch company within South Africa; and
- comply with the CIPC regulations.
“The incentive for these law changes is not clear off the bat, considering that remote workers and digital nomads are most likely registered as provisional taxpayers and pay income tax on their earnings already, meaning Sars is already gaining income tax from these earnings,” they add.
Unusual practice
It is unusual for revenue authorities globally to require foreign employers to register as an employer because the foreign employer has employed an individual who is tax resident in their countries but lives and works in another country, Chong says.
She gives the example of someone who is tax resident in South Africa but lives and works in the United Kingdom for a British company. That company will now have to register with Sars as an employer because it is paying “remuneration” to an “employee” and is an “employer”.
It is unusual because implementation of this rule in another country may be difficult. It is also difficult for revenue authorities to monitor the business operations and commercial decisions of non-resident entities operating outside their countries.
Levitan says that rather than limiting its potential as a remote working destination, South Africa should encourage skilled local workers to remain in this country instead of seeking job opportunities abroad.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning, legal or tax advice that is appropriate to every individual’s needs and circumstances.
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