Unfortunately, even at a time like this, taxes do not go away. Although many countries have closed their borders and banned international travel, technology allows a lot of work to continue. But what about the potential tax issues?
To keep the issue simple, let’s assume the employee is working in a foreign country with which South Africa has a double taxation agreement (DTA)
The normal procedure is that the employee is either:
- working at another group companies’ or client premises or
- meeting clients or other people who can potentially assist the company back in South Africa or
- A combination of (a) and (b).
In terms of (b), this is usually this is for a limited period and should not create a problem if the period is extended, although it may be too early to tell.
Scenarios (a) and (c) are usually longer-term projects, unless the employee has actually been seconded to the foreign company.
One also needs to be careful where certain projects require ad hoc or intermittent support such that the employee may commute between the host foreign country and South Africa on numerous occasions during a year. The period of six months for this is not arbitrary, although sometimes the origin of the time frame has been forgotten. While not specifically stated in the DTA, usually an employee will create what we call a permanent establishment in the foreign country if they are there for six months or more in a 12-month period. Typically, this means that your company will then have to register for income tax in the foreign jurisdiction, calculate any foreign tax, submit a foreign tax return and pay tax in the foreign jurisdiction.
All going well, you should be able to obtain a tax credit for the foreign tax paid in South Africa.
However, the effort to register for foreign tax, submit tax returns and then pay that tax is at the very least time consuming. More than likely it is also going to cost money (generally in euros/pounds or dollars).
You therefore need to consider how long has your employee been working in such jurisdictions in any 12-month period, and whether the employee(s) create a permanent establishment in that foreign country.
What about employment tax matters?
Aside from the corporate tax issues, there may also be unintended employment tax-related consequences that might arise as a result of the employee being forced to remain in the host country for an unexpected longer period owing to COVID–19. This could potentially result in unbudgeted additional employment related costs.
For example, a detained employee on project work overseas can accidentally exceed 183 days in a country and trigger tax residence status in that country, thereby becoming subjected to all of the issues that accompany that tax residency status.
It should be noted that certain countries have relaxed their rules around tax residency where it is owing to exceptional circumstances, eg COVID-19. Accordingly, it may be the case that where one can prove that the employee would have returned home to South Africa at an earlier date but for the virus outbreak, depending on the country involved, it might be the case that the additional days spent in the foreign country are ignored for tax purposes.
VAT considerations
One of the biggest misunderstandings in the VAT space is that when a company recovers salary costs from another company within the group and the employee is employed by the company recovering the cost, the cost recovery does not represent a supply for VAT purposes. The recovery of a salary cost by the employer represents a service to the other company within the group and consequently a taxable supply of a service when supplied in South Africa. This could also be applicable to other related cost recoveries.
Where such cost recovery exceeds R1 million in a 12-month period, the recovering company would be liable to register for VAT in South Africa if not already registered. This principle generally applies globally with different registrations thresholds applying in each country. Certain countries also have specific time frames related to the registration requirements.
With the extended periods employees are forced to remain in the countries they were seconded to, there could be unintended VAT registration obligations for the employer.
Foreign employees grounded in South Africa
Of course, it is equally possible that there are some foreign employees that have been grounded in South Africa at this point and this may also trigger the same or similar unintended negative tax consequences for both the employer and/or relevant cross-border employee(s).
What next?
Where you have employees that either grounded in South Africa or in a foreign country as a result of COVID-19, it is important you determine the resulting tax consequences; ie whether there are any unintended tax consequences and/or whether there are any applicable tax relieving measures in the host country that one can take advantage of.
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