Some relief for foreign employers of South Africans
THE proposed legislation would have added an administrative burden on global employers, making South African labour resources less attractive
The proposal to have all employers, regardless of whether they are resident or foreign, deduct employees’ tax has been slated as “impractical and unworkable”.
National Treasury has conceded and changed the wording to only require foreign employers conducting business through a permanent establishment in South Africa to withhold pay-as-you-earn (PAYE) tax.
In the July Draft Tax Administration Laws Amendment Bill, Treasury wanted to level the playing field between resident and non-resident employers by introducing the requirement that foreign employers be registered as employers in SA and withhold PAYE when employing SA tax residents.
However, several tax experts commented on the practical implications for foreign employers and the ability of the South African Revenue Service (Sars) to implement the requirement.
No authority
A commentator on the draft bill noted that Sars has no authority over offshore employers who may very well have no business activity or presence in South Africa, making it difficult to enforce the proposed amendment.
In terms of the initial wording of the amendment, non-resident employers would have been required to register as an employer and account for payroll taxes on remuneration paid to employees living and working in South Africa, as well as those who are SA tax residents but live and work outside the country.
In its response document, Treasury accepted the point and said the proposal would be changed to relieve non-resident employers with no business activity or presence in South Africa from withholding employee tax.
Webber Wentzel tax partner Joon Chong welcomed the change to the initial proposed amendment published in July.
“It is generally difficult for revenue authorities to monitor the business operations and commercial decisions of non-resident entities operating outside their respective countries.”
Entities without permanent establishments in SA should not be required to withhold PAYE on remuneration paid to SA residents who live and work outside SA, she added.
If the foreign employer has a permanent establishment here, it would already be required to register for income tax in SA and possibly have a bank account here with a South African bank.
“These are the practical requirements necessary for a foreign employer to register as an employer with Sars,” Chong said.
Provisional tax system
Currently, the existing provisional tax system ensures that when there is no representative employer in SA, the SA-based employees are responsible for paying their taxes through the provisional tax system.
“It is therefore unnecessary to introduce an amendment that imposes significant administrative costs for the foreign company where there exists a provisional tax system that addresses this,” another commentator remarked.
Again, only non-resident employers conducting business through a permanent establishment in SA will have to register and withhold employees’ tax.
“This will alleviate the administrative burden on non-resident employers in general and limit the obligation to non-resident employers that have business activities in South Africa,” Treasury responded.
New working arrangements
One commentator also pointed out that the new remote or hybrid workplace has become the norm globally.
“This creates employment opportunities for South Africa’s youth who are seen as reasonably cheaper and skilled compared to their foreign counterparts.”
The commentator went on to say that the proposed legislation would add an administrative burden on global employers, making South African labour resources less attractive.
“With unemployment in South Africa at record highs, this amendment may affect the ability of South African residents to participate in the global labour market.”
Treasury “partially” accepted the comment and responded that not all foreign employers would be burdened with the requirement to register as an employer in SA, but only the ones with a permanent establishment in SA.
Kyle Mandy, tax technical partner and tax policy leader for PwC South Africa, says the amended requirement that the non-resident must conduct business through a permanent establishment is far more pragmatic. This would require that the foreign employer has some nexus to the country.
“However, it is not perfect and possibly still requires some refinement in that it doesn’t go far enough and requires that the employee also have a connection to that permanent establishment before a withholding obligation arises,” he added. —