1717. Tax for expatriates
March 2009 – Issue 115
In a globalised world the days of traditional economic systems are numbered. National markets are no longer considered distinct entities isolated from each other by trade barriers, barriers of distance, time or culture. Instead, in the modern economic system national markets are merging into one huge global market and therefore, as the development in the international business environment forces companies to think of the world as one vast market, companies are also being forced to expand their business in different foreign countries, including South Africa, in order to do business globally. In this regard, there are in today's world increasing numbers of people who are sent by companies on foreign assignments for a longer or shorter period of time, and it is those people that we generally refer to as expatriates. In this article we seek to summarise the critical tax issues which would apply to them and their non-resident employers when they choose South Africa as the ultimate business destination of choice.
Non-resident employers: liability to withhold employees' taxWhere a non-resident employer or its agent in South Africa does not operate a payroll system in South Africa, and provided that all remuneration payments are made offshore to the expatriates directly, there is no liability on the non-resident employer to deduct employees' tax (also known as PAYE) in South Africa, provided that all remuneration payments are made to the expatriates through the employer's foreign payroll system. This is because in terms of paragraph 2 of the Fourth Schedule of the South African Income Tax Act, No 58 of 1962 (the Act), a non-resident employer is only obliged to register as an employer in South Africa for employees' tax purposes, and to deduct employees' tax from remuneration paid to their employees, if there is a representative employer in South Africa. Any South African agent of such employer who has authority to pay remuneration to the employees would be regarded as a representative employer.
Accordingly, where a South African agent of a non-resident employer prepares a payroll system and pays expatriates on behalf of the non-resident employer, the agent will be regarded as a representative employer and in such a case there would be a duty on such employer to register with the South African Revenue Service (SARS), deduct employees' tax and pay that over to SARS before the 7th day of each succeeding month.
The difference between the scenarios mentioned above can be explained as follows. A United States (US) construction company (Constructco) has tendered successfully to perform certain sub-contracting functions relating to the building of a power plant in South Africa, and makes a decision to bring 20 expatriates to South Africa for a period of 1 year to assist it in rendering the services. The employees' tax liability for Constructco can be summarised as follows:
· if remuneration payments are made by Constructco in the US and through its US payroll system, there is no requirement on Constructco to register for employees' tax in South Africa; · if Constructco establishes a permanent establishment or fixed base in South Africa for the duration of the contract and remuneration payments are made through that base to the expatriates in South Africa, Constructco will have an obligation to register and deduct employees' tax from such payments; or · if Constructco enters into an arrangement with a local South African company to pay remuneration on its behalf to the expatriates, the South African company will be regarded as a representative employer and will be obliged to withhold employees' tax.The income tax liability for expatriates is distinct and separate from the employer's liability to withhold tax. The duty on an employer to withhold employees' tax is dependent on whether or not remuneration, as defined in the Fourth Schedule, is paid to the employee in South Africa. If remuneration is paid there is a duty on the employer to calculate and withhold employees' tax, irrespective of whether the expatriate is subject to tax in South Africa or not. Accordingly, employers who have a duty to deduct employees' tax cannot simply choose not to on the basis that the employee is not subject to tax, unless a prior ruling is obtained from SARS.
In terms of paragraph 30(1) of the Fourth Schedule, read with section 75 of the Act, an employer commits an offence and can be liable, on conviction, to a fine or imprisonment, or both, where he fails to deduct and pay employees' tax within the prescribed period. In addition, interest at the prescribed rate, as well as penalties, may be imposed on an employer in respect of the late payment of any outstanding employees' tax.
Income tax liability for expatriatesAs stated above, the income tax liability for expatriates is distinct and separate from the employer's liability to withhold tax. When expatriates are liable for income tax in South Africa, this obligation exists regardless of whether the non-resident employer is obliged to deduct PAYE or not. If PAYE is paid, this is credited to the expatriate's tax bill, as PAYE is in fact only a mechanism for collecting tax from employees.
Prior to 1 January 2001, South African income tax was imposed mainly on a source basis. With effect from 1 January 2001, South African residents are taxed on their worldwide income and gains. An individual will be considered resident in South Africa if he meets one of two criteria, namely if he is ‘ordinarily resident' in South Africa, or, if not if he meets the tests laid down in the Act as physical presence which constitutes residency.
Firstly, it is necessary to review whether an individual is considered "ordinarily resident" in South Africa. An individual is generally considered ordinarily resident in the place where he lives with some degree of continuity apart from accidental or temporary absence.
Where an individual is not ordinarily resident in South Africa, it is necessary to consider whether the individual is a tax resident by virtue of the ‘physical presence' test. A person is considered physically present or resident in South Africa for a year of assessment if, in respect of that year, the person spends or has spent the following periods of time in South Africa:
· more than 91 days in aggregate in the year of assessment under consideration; and · more than 91 days in aggregate during each of the five years of assessment preceding the year of assessment under consideration; and · more than 915 days in aggregate during the five preceding years of assessment.Where the expatriate does not meet any of the above criteria and is classified as a non-resident, he shall be taxed only on income derived from a source in South Africa. The source of remuneration is not the country where the remuneration is paid or where the contract of employment is concluded, but the place where the services, for which the remuneration is received, are rendered. Accordingly, to the extent that expatriates have received income from a source within South Africa because they have rendered their services in South Africa, they have a responsibility to lodge annual income tax returns and pay income tax on their income.
Generally, SARS requires persons who receive remuneration from non-resident employers for services rendered in South Africa to register as provisional taxpayers. This is by virtue of the fact that the non-resident may earn taxable income that is not subject to employees' tax. There is therefore also a duty on the expatriates to register as provisional taxpayers and pay provisional tax on a six-monthly basis, which is the end of August and February of each tax year. In addition the expatriates may wish to submit a third provisional tax return no later than 30 September of each year in respect of the preceding tax year.
Where expatriates do not disclose the salaries received by them from a South African source, they run the risk of penalties, interest and additional tax, namely:
· the imposition of additional tax which can equate to 200% of the tax due on the salaries received by them; · interest on the amount of tax payable; · penalties of 10% (due to the late payment of provisional tax); and · a fine and imprisonment, or both, if convicted of the failure to complete income tax returns and pay income tax. The effect of a double tax treaty on an expatriate's tax liabilityCritical to any expatriate's circumstances is the existence of a Double Taxation Agreement ("DTA") between the expatriate's home country and South Africa, as such the DTA overrides the provisions of the Act. Where South Africa has not entered into a DTA with the expatriate's country of residence, such expatriate will not be in a position to rely on the provisions of a DTA and will have to rely on the tax rules of his home country to seek a tax credit for any taxes paid in South Africa.
However, in the event that an expatriate is tax resident in a country with which South Africa has entered into a DTA, such as India, the following provisions would apply:
· Generally, in terms of the DTA, salaries and wages derived by a resident of a foreign country in respect of employment shall be taxable only in that foreign country. If the employment is exercised in whole or in part in South Africa, then, to the extent that the employment is so exercised, such remuneration as is derived therefore, may be taxed in South Africa. · However, remuneration derived by a resident of a foreign country in respect of employment exercised in South Africa shall normally be taxed only in the foreign country (the country of residence) if: i. the expatriate is present in South Africa for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned; and ii. the remuneration is paid by, or on behalf of, an employer who is a resident of the foreign country; and iii. the remuneration is not borne from the profits of a permanent establishment or a fixed base which the employer has in South Africa.Therefore, where all salary payments are made to the expatriates through an employer's foreign payroll system, and the expatriates' remuneration was not paid from the profits of a South African base or branch, any remuneration paid to any expatriates who perform services in South Africa for less than 183 days per year in aggregate will be taxed fully in the foreign country, and no South African tax liability will arise.
Payment of expatriates’ outstanding taxes in South AfricaForeign employers often give serious consideration to paying the expatriates' outstanding taxes to SARS, on behalf of the expatriates. However, foreign employers should bear in mind that if the outstanding taxes are paid on behalf of the expatriates by virtue of their holding of an office, these payments may then become subject to South Africa tax in the hands of the expatriates as a result of either paragraph (c) or paragraph (i) of the definition of "gross income" in section 1 of the Act.
Exchange control considerationsBecause of South African exchange control regulations, the remittance of funds offshore remains subject to the approval of an authorised bank, operating under the control of the South African Reserve Bank (SARB). When remuneration payments are made to expatriates in South Africa, the expatriate's right to remit these funds from South Africa to his home country will depend entirely on whether or not he is regarded as a resident in South Africa for exchange control purposes. Generally, where an expatriate is a non-resident for exchange control purposes (i.e. he is not resident or domiciled in South Africa) he will be entitled to freely remit payments received in South Africa to his home country. In these circumstances the responsibility would rest on each expatriate to obtain the necessary authorisation from his South African bank to remit payments offshore.
On the other hand, where South African employers wish to split remuneration payments to expatriates, with the result that part of the expatriate's remuneration is paid directly into the expatriate's foreign bank account while the remainder of the remuneration, net of any employees' tax, is paid into the expatriate's South African bank account, special permission needs to be obtained by the employer from the SARB as such payment would involve a cross-border payment.
Edward Nathan Sonnenbergs
IT Act:S 1 definition of "gross income"
IT Act:S 75, par 2 and 30(1)
IT Act:4th Schedule, par (c) and par (i)