By Ruaan van Eeden (DLA Cliffe Dekker Hofmeyr Tax Alert)
Executive summary (SAIT Technical)
The rendering of services by non-resident individuals have certain specific tax implications. Generally, residents are taxed in SA on worldwide income whereas non-residents are only taxed on income from a source within SA. Such provisions may be subject to a Double Tax Agreement (DTA). In certain instances, there may also an obligation to withhold employees' tax.
The rendering of services by non-resident individuals carries with it unique tax considerations.
In most cases an individual will have to register for income tax and submit tax returns on an annual basis. Also, various hurdles may have to be negotiated, such as determining the source of the income, determining whether the provisions of a relevant Double Tax Agreement (DTA), and determining whether an employees' tax withholding obligation exists.
For purposes of this article, the focus is on an individual that has been seconded by a foreign employer to render services in South Africa. In essence, the tax considerations of the non-resident individual will be analysed as well as the position of the home and host country employer in relation to the deduction of employees' tax.
Liability to tax in South Africa
In general a 'resident', as defined in s1 of the Income Tax Act (Act), is taxed on his worldwide income, irrespective of where the income is earned. On the other hand, non-residents are only taxed on income from a South African source, subject to the application of a relevant DTA. An important aspect to take note of is that the source of income must not be confused with the place of payment – the place where a non-resident’s net income after tax is deposited (ie an offshore account) does not affect the potential liability to tax in South Africa.
The term 'source' is not separately defined in the Act, which is probably due to the fact that it would be impossible for the legislature to define the source of all types of income which a taxpayer may earn. Therefore, in determining the source of a receipt or accrual, it is necessary to consider court decisions on the subject, however, it is important to keep in mind that the determination of source is a factual question that must be determined in light of all the surrounding circumstances. In the case of services rendered in an employment context, it is a generally accepted principle that the source of income would be the place where the activity leading to the generation of income is physically being conducted (see CIR v Nell 24 SATC 261).
Where services are rendered within an employment context, as would be the case with a secondment, South Africa will, in principle, be able to tax the non-resident individual’s remuneration. However, where the non-resident individual is resident in a country with which South Africa has concluded a DTA, the taxing rights may be limited, provided certain requirements are met.
Limitation of taxing rights under a DTA
As stated before, South Africa's taxing rights may be limited under a relevant DTA, notwithstanding the fact that the non-resident individual’s remuneration is from, or deemed to be from, a local source. The basis on which South Africa's taxing rights are limited is however dependent on the wording and structure of the relevant DTA. Where a secondment is contemplated, it is critical for all parties involved to obtain professional advice regarding the interpretation and application of any relevant DTA.
The general rule applied in DTA’s based on the Organisation for Economic Co-operation and Development’s Model Tax Convention (OECD MTC), is that remuneration derived by a resident of a Contracting State (the home country) in respect of employment, shall be taxable only in that State, unless the employment is exercised in the other Contracting State (the host country). The OECD MTC goes further to state that if the employment is exercised in the other State (the host country), then that other State (the host country) may tax the remuneration, but only so much that is derived therefrom. What this means, potentially, is that both States (home and host country) will have the right to tax the remuneration and no State has the sole taxing right. The aforementioned problem generally occurs where the country in which the individual is resident taxes income on a worldwide basis as opposed to a source basis of taxation in the country where the services are actually rendered.
The OECD MTC, on which most of South Africa’s DTA’s are based, contains an exception to the general rule described above. Under the exception to the general rule, the host country’s taxing rights (in this case South Africa) over remuneration are limited where all three requirements below, as discussed below, are met. Where all three requirements below are met, the sole taxing rights on the non-resident’s remuneration will be with the home country, despite the fact a portion of the income will be from a South African source:
Requirement 1– the non-resident individual must not be present in South Africa for more than 183 days in any 12 month period.
Requirement 2– the remuneration of the non-resident individual is paid by, or on behalf of, an employer that is not resident in South Africa.
Requirement 3– the cost of the non-resident individual’s remuneration is not borne by a permanent establishment of the non-resident (home country) employer in South Africa.
Where any one of the requirements is not satisfied, then South Africa will have taxing rights over the non-resident individual’s remuneration, but only on so much that is from, or deemed to be from a South African source this would require the individual to register as a taxpayer and submit an annual income tax return if the remuneration exceeds R120,000 per annum (as currently gazetted).
Obligation to withhold employees’ tax
Once it has been determined that the non-resident individual is subject to income tax in South Africa by virtue of the source rules and the relevant DTA does not limit South Africa' taxing rights, then, a further enquiry is necessary to determine whether an employees' tax withholding obligation is present for the home or host country employer.
The Fourth Schedule to the Act determines the circumstances under which employees' tax must be withheld. Paragraph 2(1) of the Fourth Schedule to the Act provides that an employer who is a resident or representative employer in the case of a non-resident and who pays or becomes liable to pay any amount by way of remuneration to any employee, will be required to deduct employees' tax in respect of the normal tax liability of that employee.
In general, the home country employer will not be regarded as a resident employer in South Africa by virtue of the fact that it is incorporated offshore or has its place of effective management outside South Africa. The aspect that would most likely trigger an employees' tax withholding obligation in South Africa for the host country is where a 'representative employer' is present. A 'representative employer', in the case of an employer who is not resident, means any resident agent of that non-resident employer having the authority to pay remuneration. Where, for example, the cost of the non-resident individual's remuneration is carried in South Africa by way of some inter-group arrangement, it is likely that an employees' tax withholding obligation will arise. Each case must however be tested against its own facts and circumstances.
Given the complex local tax environment, coupled with the specialist approach required in relation to DTA interpretation, it is important for home and host country employers to evaluate their anticipated secondments carefully.