Foreign employment income, foreign employees and employees’ tax – some important considerations

An interesting issue in this regard: the question of an employer’s duty to withhold employees’ tax, as discussed in Issue Two of Interpretation Note 16 (IN 16), which deals with the exemption of foreign employment income in terms of s10(1)(o) of the Income Tax Act. Furthermore, how much withholding tax should an employer withhold where a non-resident employee renders services in South Africa?

The legal principles

In terms of s10(1)(o)(ii) of the Act, certain types of remuneration that a person receives or that accrues to a person for services rendered outside South Africa, will be exempt from income tax in South Africa provided that the following two requirements are met:

• the person spent at least 183 days outside South Africa during any 12-month period; and
• during that 12 month period, the person spent at least 60 days continuously outside South Africa.

The Fourth Schedule to the Act (Fourth Schedule) defines remuneration broadly. It includes other types of remuneration not referred to in s10(1)(o)(ii). Paragraph 2 of the Fourth Schedule states that every employer who is a resident or representative employer (in the case of an employer who is not a resident) who pays or has to pay amounts that fall within the definition of “remuneration”, must deduct and withhold employees’ tax.

In terms of paragraph (ii) of the “gross income” definition in s1 of the Act, where a person is not a resident, only the amount received by or accrued to that person from a source within the Republic forms part of that person’s gross income. If a person is not a South African for tax purposes and received remuneration from a South African company, one would have to look at where the services are rendered. Only to the extent that the services are rendered in South Africa, will the remuneration be received from a South African source. For example, if a non-resident employee receives remuneration from a South African resident employer and he spent 100 days of the year of assessment in South Africa in rendering the services, only that portion of his remuneration must be included in his gross income.

Deduction of employees’ tax where remuneration is paid to non-resident employees

An interesting situation arises where a person is not a South African resident, but receives a salary from an employer who is a resident. When the principles referred to above are applied, it would appear that the employer would only have to withhold employees’ tax to the extent that the employee’s remuneration originated from a South African source. As the s10(1)(o)(ii) exemption applies to any taxpayer and not only to South African residents, it would be possible for the non-resident employee to also rely on this provision, but the result would be the same and it would probably make more sense to determine the taxable portion with reference to where the services were rendered.

IN 16 states that where the s10(1)(o)(ii) exemption applies, an employer would still have the obligation to deduct employees’ tax under the Fourth Schedule. If an employer elects not to deduct employees’ tax and it turns out that the person did not qualify for the exemption, the employer would be liable for the employees’ tax not deducted and any concomitant penalties and interest. It might be possible to argue that where a person is a non-resident and only a portion of their income is taxable in South Africa based on the source of the income, the same principles would apply.

It appears that the only way in which such a non-resident employee will be exempt from tax in South Africa, is where the double tax agreement (DTA) between South Africa and the country in which that person is a tax resident makes provision for this. For example, some DTAs concluded between South Africa and other countries state that where a non-resident employee receives
remuneration for work done in South Africa, that remuneration will not be taxable in South Africa if the person:

• was outside of South Africa for more than 183 days;
• the remuneration was paid by or on behalf of an employer in the other state; and
• the remuneration is not borne by a permanent establishment or a fixed base which the employer has in South Africa.

Comment

South African employers who employ foreigners to do work in the country should take note of the above provisions. If a South African employer withholds employees’ tax in excess of the amount that relates to income from a South African source, such a non-resident employee would have to most likely recoup the overpaid tax by lodging an objection against an assessment issued by SARS. The dispute resolution process can be very time-consuming and from a cash-flow perspective, could have a detrimental effect on such non-resident employees. South African employers should therefore consider the provisions of the Act and the relevant DTA, before appointing foreign employees locally.