Tax considerations for non-residents with remote employees in South Africa
Tax considerations for non-residents with remote employees in South Africa
By Martin Groenewald, Consultant
Improved technology, relaxed work-from-home policies and an increased trend toward globalisation have allowed employees to continue working for the same employer, but from a foreign jurisdiction. This article aims to address some of the tax risks and obligations for non-residents with employees working in South Africa (‘SA’).
Background
SA has a residence-based system of tax. Any resident, as defined in section 1 of the Income Tax Act (‘the Act’), subject to exemptions, deductions and other provisions, is subject to normal income tax on their worldwide income. By contrast, any non-resident is only subject to normal tax on income from a SA source. A company is ‘resident’ in SA for income tax purposes if it is either incorporated, established or formed in SA or if it has its place of effective management (‘POEM') in SA, provided that it is not deemed to be exclusively a resident of another country for purposes of a double taxation agreement (‘DTA’) between SA and that other country.
Permanent Establishments
Notwithstanding the fact that a company formed outside of SA might be able to satisfactorily prove that its POEM will remain in the foreign jurisdiction (and therefore that it should be exclusively tax resident in the foreign jurisdiction and not in SA), there remains a potential risk for non-resident companies that involves the concept of a permanent establishment (‘PE’). In terms of DTAs entered into between SA and many foreign jurisdictions, South Africa has taxing rights over business profits of a resident of the other jurisdiction to the extent that the business profits are attributable to a PE in SA of that non-resident. For purposes of this article, the concept of PEs will not be considered in detail, but rather in the context of employees of non-resident companies who are present in South Africa.
A PE is defined in section 1 of the Act to mean a PE as defined from time to time in Article 5 of the Model Tax Convention on Income and on Capital of the Organisation for Economic Co-operation and Development (‘OECD MTC’). According to Article 5(1) of the OECD MTC (and most DTAs), a PE is "a fixed place of business through which the business of an enterprise is wholly or partly carried on."
SARS has not published guidance on whether an employee’s home office could constitute a "fixed place of business" for purposes of interpreting the PE definition. However, the OECD’s Commentary on the OECD MTC (‘the OECD Commentary’) specifically addresses the use of home offices, and South African courts have in the past considered the OECD Commentary in interpreting DTA articles. According to the OECD Commentary, if a home office is used on a continuous basis for carrying on business activities for an enterprise and it is factually clear that the company has required the individual to use that location to carry on the enterprise’s business, such a home office may be considered to be at the disposal of the company and constitute a PE.
It is worth noting that even if an enterprise does not have a fixed place of business in SA, a dependent agent who acts on behalf of an enterprise in a certain manner can still create a PE for the non-resident enterprise.
PEs are a complex concept which should be analysed in detail and in tandem with a South African tax advisor, having sufficient regard to legislation and the applicable DTA as may be modified by the Multilateral Convention to implement tax treaty related measures to prevent base erosion and profit shifting (the so-called ‘MLI’).
Payroll implications
An employer that is a resident must register for and withhold employees’ tax (PAYE) on remuneration paid to employees. Previously, non-resident employers had an obligation to withhold PAYE on remuneration paid to employees if the employer had a 'representative employer' in SA. A representative employer is essentially any agent with the authority to pay remuneration that resides in SA. However, the Tax Administration Laws Amendment Act, 2023, amended paragraph 2(1) of the Fourth Schedule to the Act. A non-resident employer conducting business through a PE in SA is now required to deduct PAYE from remuneration paid to its employees, unless SARS directs otherwise. These non-resident employers must also register as an ‘employer’ with SARS for PAYE purposes if they have any employees with a tax liability in South Africa.
Due to the wording of the Unemployment Insurance Fund (UIF) and Skills Development Levy (SDL) legislation, a misalignment exists. A non-resident employer would usually still be obligated to pay UIF and SDL to SARS relating to its employees in SA, even if the company does not have a representative employer or PE in SA.
Reportable arrangements
Sections 34 to 39 of the Tax Administration Act (‘TAA’) mandate the disclosure of certain transactions to SARS, known as ‘reportable arrangements.’ An arrangement qualifies as a 'reportable arrangement' if it meets specific characteristics outlined in section 35(1) of the TAA or if it is specifically listed by the Commissioner of SARS in a Public Notice. In this regard, Public Notice 140 was issued on 3 February 2016 (‘the Notice’).
According to paragraph 2.6 of the Notice, an arrangement will constitute a reportable arrangement if it involves service fee payments made by a South African resident, or a non-resident with a PE in SA, to a non-resident. These services include consultancy, construction, engineering, installation, logistical, managerial, supervisory, technical, and training services. Additionally, the expenditure for these services on or after the date of publication of the Notice should exceed or be anticipated to exceed R10 million and should also not qualify as remuneration for employees’ tax purposes. Also, a person that is a not a resident or an employee, agent or representative of that person must either be physically present in SA or be anticipated to be physically present in SA, in connection with or for purposes of rendering the services.
In terms of section 37 of the TAA, a ‘participant’ in a reportable arrangement must report that reportable arrangement to SARS within 45 business days of the arrangement qualifying as reportable arrangement, or if the participant becomes a participant in an arrangement after the arrangement qualifies as a ‘reportable arrangement’, within 45 business days of becoming a ‘participant’. A ‘participant’ includes a ‘promoter’ in relation to the arrangement, any person who directly or indirectly derives or is assumed to derive a tax benefit or financial benefit from the arrangement or any other party to an arrangement listed in a public notice.
Therefore, if the above criteria for a reportable arrangement are met, both the person performing the listed services and the South African resident (or non-resident with a PE in South Africa) have an obligation to report the arrangement. However, section 37(3) of the TAA states that a ‘participant’ need not report a reportable arrangement if a written statement from any other ‘participant’ is obtained that the other ‘participant’ has disclosed the reportable arrangement. Failure to disclose a reportable arrangement can result in significant penalties imposed by SARS.
Conclusion
The above discussion has highlighted various risks for non-residents with employees in SA. It is important for such non-residents to be mindful of the potential tax consequences to avoid the imposition of the various penalties and interest that may result from non-compliance with the provisions.
Improved technology, relaxed work-from-home policies and an increased trend toward globalisation have allowed employees to continue working for the same employer, but from a foreign jurisdiction. This article aims to address some of the tax risks and obligations for non-residents with employees working in South Africa (‘SA’).
Background
SA has a residence-based system of tax. Any resident, as defined in section 1 of the Income Tax Act (‘the Act’), subject to exemptions, deductions and other provisions, is subject to normal income tax on their worldwide income. By contrast, any non-resident is only subject to normal tax on income from a SA source. A company is ‘resident’ in SA for income tax purposes if it is either incorporated, established or formed in SA or if it has its place of effective management (‘POEM') in SA, provided that it is not deemed to be exclusively a resident of another country for purposes of a double taxation agreement (‘DTA’) between SA and that other country.
Permanent Establishments
Notwithstanding the fact that a company formed outside of SA might be able to satisfactorily prove that its POEM will remain in the foreign jurisdiction (and therefore that it should be exclusively tax resident in the foreign jurisdiction and not in SA), there remains a potential risk for non-resident companies that involves the concept of a permanent establishment (‘PE’). In terms of DTAs entered into between SA and many foreign jurisdictions, South Africa has taxing rights over business profits of a resident of the other jurisdiction to the extent that the business profits are attributable to a PE in SA of that non-resident. For purposes of this article, the concept of PEs will not be considered in detail, but rather in the context of employees of non-resident companies who are present in South Africa.
A PE is defined in section 1 of the Act to mean a PE as defined from time to time in Article 5 of the Model Tax Convention on Income and on Capital of the Organisation for Economic Co-operation and Development (‘OECD MTC’). According to Article 5(1) of the OECD MTC (and most DTAs), a PE is "a fixed place of business through which the business of an enterprise is wholly or partly carried on."
SARS has not published guidance on whether an employee’s home office could constitute a "fixed place of business" for purposes of interpreting the PE definition. However, the OECD’s Commentary on the OECD MTC (‘the OECD Commentary’) specifically addresses the use of home offices, and South African courts have in the past considered the OECD Commentary in interpreting DTA articles. According to the OECD Commentary, if a home office is used on a continuous basis for carrying on business activities for an enterprise and it is factually clear that the company has required the individual to use that location to carry on the enterprise’s business, such a home office may be considered to be at the disposal of the company and constitute a PE.
It is worth noting that even if an enterprise does not have a fixed place of business in SA, a dependent agent who acts on behalf of an enterprise in a certain manner can still create a PE for the non-resident enterprise.
PEs are a complex concept which should be analysed in detail and in tandem with a South African tax advisor, having sufficient regard to legislation and the applicable DTA as may be modified by the Multilateral Convention to implement tax treaty related measures to prevent base erosion and profit shifting (the so-called ‘MLI’).
Payroll implications
An employer that is a resident must register for and withhold employees’ tax (PAYE) on remuneration paid to employees. Previously, non-resident employers had an obligation to withhold PAYE on remuneration paid to employees if the employer had a 'representative employer' in SA. A representative employer is essentially any agent with the authority to pay remuneration that resides in SA. However, the Tax Administration Laws Amendment Act, 2023, amended paragraph 2(1) of the Fourth Schedule to the Act. A non-resident employer conducting business through a PE in SA is now required to deduct PAYE from remuneration paid to its employees, unless SARS directs otherwise. These non-resident employers must also register as an ‘employer’ with SARS for PAYE purposes if they have any employees with a tax liability in South Africa.
Due to the wording of the Unemployment Insurance Fund (UIF) and Skills Development Levy (SDL) legislation, a misalignment exists. A non-resident employer would usually still be obligated to pay UIF and SDL to SARS relating to its employees in SA, even if the company does not have a representative employer or PE in SA.
Reportable arrangements
Sections 34 to 39 of the Tax Administration Act (‘TAA’) mandate the disclosure of certain transactions to SARS, known as ‘reportable arrangements.’ An arrangement qualifies as a 'reportable arrangement' if it meets specific characteristics outlined in section 35(1) of the TAA or if it is specifically listed by the Commissioner of SARS in a Public Notice. In this regard, Public Notice 140 was issued on 3 February 2016 (‘the Notice’).
According to paragraph 2.6 of the Notice, an arrangement will constitute a reportable arrangement if it involves service fee payments made by a South African resident, or a non-resident with a PE in SA, to a non-resident. These services include consultancy, construction, engineering, installation, logistical, managerial, supervisory, technical, and training services. Additionally, the expenditure for these services on or after the date of publication of the Notice should exceed or be anticipated to exceed R10 million and should also not qualify as remuneration for employees’ tax purposes. Also, a person that is a not a resident or an employee, agent or representative of that person must either be physically present in SA or be anticipated to be physically present in SA, in connection with or for purposes of rendering the services.
In terms of section 37 of the TAA, a ‘participant’ in a reportable arrangement must report that reportable arrangement to SARS within 45 business days of the arrangement qualifying as reportable arrangement, or if the participant becomes a participant in an arrangement after the arrangement qualifies as a ‘reportable arrangement’, within 45 business days of becoming a ‘participant’. A ‘participant’ includes a ‘promoter’ in relation to the arrangement, any person who directly or indirectly derives or is assumed to derive a tax benefit or financial benefit from the arrangement or any other party to an arrangement listed in a public notice.
Therefore, if the above criteria for a reportable arrangement are met, both the person performing the listed services and the South African resident (or non-resident with a PE in South Africa) have an obligation to report the arrangement. However, section 37(3) of the TAA states that a ‘participant’ need not report a reportable arrangement if a written statement from any other ‘participant’ is obtained that the other ‘participant’ has disclosed the reportable arrangement. Failure to disclose a reportable arrangement can result in significant penalties imposed by SARS.
Conclusion
The above discussion has highlighted various risks for non-residents with employees in SA. It is important for such non-residents to be mindful of the potential tax consequences to avoid the imposition of the various penalties and interest that may result from non-compliance with the provisions.