Potential employees’ tax registration in south africa for foreign employers

Potential employees’ tax registration in south africa for foreign employers

By Dumisa Sihawu, Head of Global Employer Services

In the recently published Draft Tax Administration Laws Amendment Bill issued by National Treasury, there is a proposal to align the responsibilities of employers in relation to the withholding of Employees’ Tax (“PAYE”). This will be done by requiring both resident and foreign employers to withhold PAYE on remuneration paid to employees.

Currently, only a South African resident employer or a representative employer in case of a foreign employer, has the responsibility to withhold and pay over PAYE in South Africa. Where there is no representative employer, then the employee is normally responsible for the payment of income tax earned on the remuneration income in South Africa via the provisional tax payment system.

There has long been a mismatch between the PAYE legislation and the Skills Development Levy (“SDL”) and Unemployment Insurance Fund (“UIF”) legislation. The SDL and UIF Acts do not contain a collection mechanism other than registration and payment by the employer. Therefore, if an employer had individuals working in South Africa, there is currently a requirement for the employer to register and contribute to SDL and deduct and contribute to UIF.

The argument for the proposed change is that, given the recent remote and hybrid working environment, many individuals are not reporting their taxes in South Africa, and SARS has no way of tracking these non-compliant individuals. These changes will force the employers to withhold PAYE and, where required in terms of the law, the individuals to report the income and submit tax returns where they are employed by a foreign employer, as SARS will have this data through the monthly PAYE system.

However, the proposed change means that an employer that has any individuals who earn remuneration income that is taxable in South Africa may have a registration and withholding obligation in respect of PAYE. As such, they would be required to register with SARS as an employer and withhold and pay over PAYE, SDL and UIF.

This will bring an added burden on foreign employers, especially those that do not have any operations in South Africa, but who employ individuals based in South Africa or South African resident individuals based abroad. With the shift in the labour market where individuals are allowed to work remotely, this will really be difficult for many foreign employers. This is because some employers do not keep track of employees’ presence, where employees are on a full-time remote or hybrid working arrangement. This will prove a challenge for these foreign employers, as they would now need to register with SARS in South Africa as an employer, administer a payroll and submit monthly turns and bi-annual reconciliations.

The are also various practical considerations that will add complexity and complications for these foreign employers. These include, but are not limited to:

  • Registering with SARS for PAYE in cases where the foreign employer does not have a SA bank account;
  • Keeping track of their employees that are working in South Africa for short periods of time with no relief in terms of a double taxation agreement;
  • SA tax residents working in South Africa for periods of time where they are normally not stationed full-time in South Africa; and
  • Applying the SA foreign employment income exemption (section 10(1)(o)(ii)) and limitations where South African resident individuals render services offshore as a result of their employment.

There have been various interactions with National Treasury by various industry bodies including BDO, and it remains to be seen how the proposed changes to the legislation will be implemented and what guidance and measures, if any, will be put in place to ease the burden on foreign employers.

Since the penalty regime for non-compliance can be costly, it is our view that foreign employers should investigate the appropriate measures to put in place should the proposal become law. These measures include tracking the jurisdictions in which their employees are located, to ensure they do not fall foul of the South African legislation. We would advise that where a foreign employer has employees in South Africa, tax advice is sought from a reputable tax practitioner.