Tax implications for foreign employees

The belief that a non-resident business traveller will not be taxable if the person does not spend more than 183 days a year in South Africa is only “partly true” when it comes to the local tax regime, says Deloitte.

In order for the 183-day rule to be used, says Jaco La Grange, Associate Director in Tax at Deloitte, the person relying on it needs to satisfy several criteria.

Commenting on the 'tax headaches' associated with being a business traveller in the fourth edition of the Deloitte “Tax News” publication, La Grange said the first requirement for benefiting from the rule is that the person concerned needs to be a tax resident of another country that has a double tax agreement in place with South Africa. “Finally, the person needs to comply with the other requirements of double taxation agreements relating to the 183-day rule,” says La Grange.

Generally speaking, says La Grange, double taxation agreements entered into by South Africa provide that a tax resident of another country will be taxable in that country only on South African-sourced remuneration, if:

* The foreign tax resident receiving remuneration is in South Africa for periods not exceeding 183 days in total in any 12-month period beginning or ending in the fiscal year concerned.
* Remuneration is paid by, or on behalf of, an employer who is not resident in South Africa, and;
* The remuneration is not borne by a permanent establishment that the employer has in South Africa.

This means that South Africa will not have taxing rights over the South African-sourced income if these requirements are complied with.

La Grange indicates that it is important to note that, when looking at the second requirement, SARS seems to be following a substance-over-form approach (i.e. the so-called 'economic employer' approach). South Africa's position follows the current trend in international interpretation as expressed in the Commentary to the Model Tax Convention of the Organisation for Economic Co-operation and Development (OECD). Although South Africa is not a member of the OECD, it generally subscribes to the rules set out in the Commentary.

“What this all means, is that, if a non-resident person is working in South Africa, and, while in South Africa, can effectively be considered an employee of a South African resident entity, the person will not qualify for double tax agreement relief. This could occur even though the person concerned is formally employed outside South Africa and is paid by a non-resident entity,” says La Grange.

“Factors that will be taken into account when determining this status will be considerations about who supervises and controls the person, and whether salary costs are recharged to local operations.

“What should also not be overlooked is that a person's frequent and consistent presence in a country over time could create a 'permanent establishment' for their employer in the country where the employee performs the services.

“Double taxation agreements are increasingly including these permanent establishment rules. These rules hold that if a company within a country provides services to, or in, another country, and those services require a presence in the host country for specified periods of time, these will be regarded as permanent establishments,” says La Grange.

South African organisations should therefore consider redesigning their processes to include consideration of several factors. These could include:

* Dealing with demands for compensation from short-term expatriate employees that become liable for South African tax.
* Designing specific short-term assignment policies that deal with tax equalisation or tax protection.
* Assistance with a short-term expatriate employee's tax compliance and costs.
* Examination of practices in respect of short-term expatriate employees.

In addition to these policies, procedures and processes will also have to be considered to track the movement of short-term assignees. Other steps could include the incorporation of short-term assignments into accounting functions, as well as tax and transfer pricing policies. Definition of roles, responsibilities and reporting lines are also important.

“Taking active steps are required,” says La Grange, explaining that SARS, because of pressure to increase revenue, may intensify its focus on this area.