27 February 2010
Posted by: Author: Anthea Scholtz and Tracy Smith
Employing foreign expatriates on secondment is usually accompanied by the provision of a whole host of extras—which means that fringe benefits must be accounted for
Does your South African resident company provide fringe benefits to expatriate employees? If so, is your company withholding monthly employees' tax (PAYE) in respect of these benefits? Over the last few years, there has been a marked increase in the number of foreign expatriate employees who render services in South Africa on international assignments. Typically, in terms of this arrangement, the expatriate's foreign employer would, for the duration of the assignment period in South Africa, continue to pay his salary where as the South African company who is utilising the services of the expatriate would be responsible for providing the expatriate with certain fringe benefits whilst on assignment in South Africa.
These fringe benefits typically include providing the expatriate with the use of residential accommodation, car hire, a company car, armed response, a subsistence allowance, living allowance, etc. In some cases, the South African company may also settle the expatriate's South African income tax liability on his behalf to the extent that his South African tax obligation exceeds the foreign tax obligation which he would have incurred had he remained in his home country. This so-called "tax equalisation” also constitutes a fringe benefit granted to the expatriate.
However, a common mistake made by many South African companies in these circumstances, is that they do not withhold PAYE in respect of these fringe benefits provided, where the expatriate is physically present in South Africa for 183 days or less (i.e. the cut-off period prescribed by most double taxation agreements (DTAs) when determining whether an expatriate is taxable in his home country or in South Africa).
This failure to withhold PAYE exposes the South African company to significant tax risk. The reason for this is due to the fact that when a South African resident company pays any remuneration or provides any fringe benefits to any expatriate employees, that company has a PAYE (and skills development levy!) obligation, regardless of:
• Whether the expatriate is physically present in South Africa for more or less than 183 days during any period; or
• Whether the expatriate is legally employed by the South African company.·
No tax relief is granted by the DTA in these circumstances, as this tax relief only applies if the remuneration or fringe benefits are paid or provided to the expatriate by a non-resident employer. Furthermore, the expatriate will also personally be liable to income tax in South Africa and should therefore register as a South African taxpayer.
Thus, every South African company that utilises the services of expatriates from offshore,regardless of the length of stay of the expatriate in South Africa, should withhold monthly PAYE in respect of any remuneration paid or fringe benefits provided to that expatriate. An IRP5 certificate must also be issued to that expatriate.
Failure to withhold the required PAYE and account for the skills development levy may result in SARS imposing interest, penalties and 200% additional tax in respect of the company's outstanding obligations.
That said, it is generally not a very simple task for the South African company to actually withhold the PAYE from the remuneration paid or fringe benefits provided to the expatriates. This is due to the fact that there are a number of unique tax issues that must be considered when doing these PAYE calculations, which are often not catered for by the company's existing payroll system.
These issues include:
•The need to track the number of days and historic remuneration figures for purposes of calculating the residential accommodation fringe benefit; and
•The requirement to calculate the fringe benefit arising on settlement of the expatriate's income tax obligation by the South African company.
In order to overcome these problems and correctly withhold PAYE in respect of its expatriates, companies will generally need to put their expatriates on a separate (often manual) payroll which should take into account these unique tax complexities. Whilst the initial set up of such an expatriate payroll may be a painful process, the long-term benefits far out weigh this.
Given that SARS has recently established an Expatriate Unit to specifically deal with expatriate tax issues, now is certainly a good time for your company to get its expatriate PAYE affairs in order.
Source: By Anthea Scholtz and Tracy Smith (Taxbreaks)