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ANALYSIS: PROVISIONAL TAX

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An alternative for remuneration not subject to employees’ tax

The signing of the Tax Administration Laws Amendment Bill 2016 into law on 11 January 2017 extends the ambit of the provisional tax legislation to include remuneration from an employer who is not registered for employees’ tax.

In the global mobility space, it is common practice for foreign national employees to remain on the home country employer’s or on the seconding employer’s payroll. This is to ensure that home country contributions together with home country expenses are adequately taken care of while the individual is assigned to work in a foreign country.

In other cases, a split pay arrangement may apply where a portion of the salary gets paid in the home country and a portion in the host country.

CURRENT TREND FOR SOUTH AFRICANS

Assuming that South Africa has the right to tax the income derived for services rendered in South Africa, that is, a liability for normal tax exists, the tax collection mechanism, either in the form of monthly employees’ tax withholding or provisional tax, needs to be considered.

In regard to foreign nationals working in South Africa, there is often a debate regarding the employees’ tax withholding obligation. Where employees’ tax does not apply, the dilemma extends to whether or not the foreign remuneration should be included for the purpose of determining the provisional tax liability.

This issue was raised in the public comments to the Standing Committee on Finance (SCoF) regarding the proposed legislation dealing with the notification of by the Commissioner of any category of persons that they are provisional taxpayers in the Draft Taxation Laws Amendment Bill 2016 (DTLAB).

THE EMPLOYEES’ TAX CONSIDERATION

If the foreign national is seconded to a group entity in South Africa, such entity does not pay the individual, nor is the local entity liable to pay the individual. In this regard, the provisions of paragraph 2(1) of the Fourth Schedule to the Income Tax Act 58 of 1962 (the Act) do not apply and the local entity therefore does not have an employees’ tax withholding obligation.

Where the home country employer does not have a South African resident entity or is not registered as an external company (that is, a branch) in South Africa, there is no resident employer or resident representative employer as envisaged in paragraph 2(1) of the Fourth Schedule to the Act.

Accordingly, no employees’ tax withholding obligation exists and to the extent a liability for normal tax exists, the tax liability is discharged upon assessment of the foreign national’s annual income tax return.

VOLUNTARY REGISTRATION AS AN EMPLOYER FOR EMPLOYEES’ TAX

Where a liability to contribute toward statutory levies such as the Skills Development Levies (SDL) and unemployment insurance contributions exists for the resident/non-resident employer, given the anomaly associated with the registration process, certain branches of external companies voluntarily register as an employer for the purpose of withholding and remitting employees’ tax.

The anomaly is that the application for registration as an employer for the purpose of withholding and remitting employees’ tax is a precursor and is a requirement for registering the other statutory levies such as SDL. The voluntary registration as an employer facilitates the registration process for these other statutory levies.

ALTERNATIVE TAX COLLECTION MECHANISM: PROVISIONAL TAXPAYER

The amended legislation dealing with  paragraph 1 of the Fourth Schedule to the Act, will empower the Commissioner to notify any category of persons that they are provisional taxpayers.

POSITION REGARDING FOREIGN NATIONAL EMPLOYEES

In accordance with current practice, where no employees’ tax withholding obligation exists, foreign nationals either voluntarily register as provisional taxpayers or settle the tax liability upon assessment. Where the tax liability is settled upon assessment, the South African Revenue Service (SARS) issues a retrospective registration as a provisional taxpayer, thereby levying concomitant penalties and interest in respect of the underpayment of provisional tax. This results in various requests being made to SARS to remit the penalties and interest given that the current legislation does not impose a mandatory obligation to settle the tax liability arising from remuneration by way of provisional tax.

The wording of the definition of a ‘provisional taxpayer’ contained in paragraph 1 of the Fourth Schedule to the Act prior to the amendment, made it  clear that a person who derives income that constitutes ‘remuneration’ is excluded from such definition. A person who derived ‘remuneration’ that was not subjected to employees’ tax withholding was therefore not required to register as a provisional taxpayer.

However, the amended legislation extends the ambit of the provisional tax collection mechanism to catch remuneration payments that are not subjected to employees’ tax withholding where there is no registered employer for the purpose of withholding and remitting employees’ tax.  The wording of the definition of a ‘provisional taxpayer in paragraph 1 of the Fourth Schedule has been  amended to include any remuneration from an employer who is not registered in terms of paragraph 15 to the Fourth Schedule.

Furthermore, the part of the definition dealing with exclusions under sub-item (BB) has been amended to extend the provisional tax collection mechanism to employees that receive remuneration that has not been subjected to employees’ tax withholding. The amendment now facilitates the upfront collection of taxes where remuneration is not subject to employees’ tax. The tax position relating to the different categories of employees is detailed below.

The provisional tax treatment for foreign national employees seconded or assigned to work in South Africa but paid by a non-resident employer, and

The provisional tax treatment for local employees who are remunerated by a non-resident employer

POSITION REGARDING FOREIGN NATIONAL EMPLOYEES

Based on the revised legislation contained in the Fourth Schedule dealing with the requirement to register as an employer for the purpose of withholding and remitting employees’ tax, the remuneration paid by a non-resident employer will no longer be excluded from the payment of provisional tax. Registration as a provisional taxpayer by the foreign national is therefore mandatory.

POSITION REGARDING LOCAL EMPLOYEES

Local employees who derive remuneration from a foreign employer, which is not subject to employees’ tax withholding, will have a mandatory obligation to register as a provisional taxpayer to settle the tax liability in respect of the remuneration so derived.   The revised legislation requires that such local employees also be included in the provisional tax net.

Author: Shohana Mohan is Director and Head of Individual & Expatriate Tax, BDO South Africa Tax Services (Pty) Ltd