By Erika Wessels
The April 2012 edition of De Rebus contained an article by Heather Brownell on the legal matters to bear in mind when considering what constitutes an ‘employment contract within South Africa’ in terms of the Companies Act 71 of 2008 (the new Companies Act) (see 2012 (Apr) DR 38). This consideration becomes relevant when deciding whether a foreign company is required to register with the Companies and Intellectual Property Commission (CIPC) as an external company in South Africa.
This article considers the employees’ tax matters that typically arise when a non-resident company engages with an expatriate employee for purposes of rendering services in South Africa. It will focus on the income tax rules applicable to the employee and the employees’ tax responsibilities of the employer.
This is especially relevant in the light of the influx of individuals into South Africa for purposes of providing specialised services in various industries. This article aims to assist advisers, from an individual as well as from an employees’ tax perspective, in cutting through the complexity of addressing questions that arise when assisting their clients.
Below I consider the hypothetical facts to which Ms Brownell’s article related and which will form the backdrop of the discussion that follows.
Hypothetical scenario
A foreign company, Consulting Co, which is registered in Italy, enters into a services contract with South African manufacturing company, SA Co. In terms of this services contract, Consulting Co will provide SA Co with an individual, Ms Morlani (who is in the employ of Consulting Co and has specialised skills) for a period of 12 months to assist SA Co in an area of its business requiring these specialised skills. Ms Morlani has a work permit to work in South Africa for these 12 months only. Ms Morlani signed an employment contract with Consulting Co, in Italy, many years before. The services contract is the only ‘business’ Consulting Co does in South Africa. Consulting Co will not have an office in South Africa. When this services contract comes to an end, Consulting Co has no legitimate expectation that SA Co will want to renew it, at which time Ms Morlani will return to Italy. SA Co will pay Consulting Co offshore, so there is no need for Consulting Co to open a South African bank account. Consulting Co pays Ms Morlani from Italy.
This article considers –
Income tax considerations for the expatriate employee
In terms of the definition of ‘gross income’ in the Income Tax Act 58 of 1962 (the Act), South African residents are taxed on their worldwide income, while non-residents are only taxed on their South African sourced and deemed source income.
‘Gross income’ is defined in s 1 of the Act as follows:
‘“Gross income”, in relation to any year or period of assessment, means –
(i) in the case of a resident, the total amount in cash and otherwise, received by or accrued to or in favour of such resident; or
(ii) in the case of any person other than a resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such person from a source within or deemed to be within the Republic, during such year or period of assessment …’.
Therefore, provided a non-resident earns taxable income above the tax threshold, a liability for normal tax in South Africa will arise. The source of income for services rendered is located where the services are rendered. Therefore, non-residents are liable for tax in South Africa on any remuneration earned from services rendered while physically working in South Africa since this will be considered to be South African sourced income.
Even though the expatriate employee rendering these specialised services in South Africa will not be resident for income tax purposes, she will be liable for tax on her South African sourced or deemed source income subject to the provisions of the double taxation agreement (DTA) between South Africa and Italy.
The DTA between South Africa and Italy determines that salaries, wages and other similar remuneration derived by a resident of Italy for employment exercised in another contracting state (here South Africa), will be taxable in the state in which the employment is conducted (South Africa). Relief is, however, provided when certain requirements are met. In this instance these requirements will not be met (specifically the 183-day presence requirement). The expatriate employee will have a South African tax liability based on the South African sourced income she earns for services rendered in South Africa.
Responsibility to withhold employees’ tax
In terms of para 2 of the fourth schedule to the Act, every employer is obliged to withhold employees’ tax in respect of the liability for normal tax of that employee. The requirement to withhold employees’ tax will, therefore, only arise in the event of an employer paying remuneration to an employee in respect of the employee’s liability for normal tax.
An ‘employer’ is defined as someone who pays or is liable to pay remuneration. Should the employer be non-resident, it must be considered whether there is a representative employer that would have the responsibility to withhold the employees’ tax.
Paragraph 1 of the fourth schedule defines a ‘representative employer’ as follows –
‘“representative employer” means –
… in the case of any employer who is not ordinarily resident in the Republic, any agent of such employer having authority to pay remuneration …’.
The South African Revenue Service (SARS) issues binding private rulings (BPRs) to provide an indication of the manner in which it interprets specific pieces of legislation. In Binding Private Ruling 85 of 27 May 2010, SARS indicated that where individuals are employed by non-resident companies and are assigned to a South African resident company, it will treat the South African company as the employer for the duration of the assignment. This would mean that the South African company would have to withhold employees’ tax.
BPRs are not, however, law and are only binding on the particular set of facts in terms of which the BPR was applied for.
‘Remuneration’ is widely defined in the Act and includes all payments and amounts payable, in cash or otherwise, whether or not for services rendered (ie, salary and wages, leave pay, bonuses, gratuities, commissions, fees and overtime pay).
The definition of ‘employee’ includes a person (other than a company) who receives remuneration or to whom remuneration accrues.
Application to the hypothetical scenario
Based on the facts of the hypothetical scenario set out above, I am of the view that Ms Morlani will qualify as an employee to whom remuneration will be paid. She will be employed by Consulting Co and Consulting Co will pay her the amounts she receives for services she renders in South Africa. Further, these amounts paid fall within the definition of ‘remuneration’ as they are paid to her as a salary with respect to the services she renders in South Africa as an employee of Consulting Co.
Further, I am of the view that SA Co is not a representative employer as it is not an agent of Consulting Co with the authority to pay remuneration to the expatriate employee.
Therefore, even though Consulting Co is a non-resident employer, it is not liable to withhold South African employees’ tax on the payment it makes to the non-resident employee.
The expatriate employee will, however, have a South African tax liability as a result of the services she renders in South Africa.
In my experience, despite the fact that the legislation does not require employees’ tax to be withheld by a non-resident employer for a non-resident employee as there is no South African employer or representative employer, this leads to several queries raised by SARS when assessing an individual’s tax return. SARS may view that individual as a ‘provisional taxpayer’, even though the individual may not qualify in terms of the definition of a provisional taxpayer (since she will only receive employment income in South Africa).
SARS has previously levied interest and penalties against individuals who have not submitted provisional tax returns during the tax year. These may be waived on request from the taxpayer, but the process entails considerable time and effort on the part of the taxpayer and the desired result may only be achieved much later.
Conclusion
When advising on the potential incorporation of an external company in South Africa, time should be spent in considering the South African income tax consequences of affected expatriate employees as well as the potential employees’ tax obligations of the external company itself.
Erika Wessels BA LLB (Stell) LLM Taxation (UCT) is a manager at KPMG in Cape Town.
This article was first published in De Rebus in 2012 (May) DR 46.
