The tax risks of cross-border employment
13 January 2016
Posted by: Author: Shohana Mohan
Author: Shohana Mohan (KPMG)
The issues relating to the international hiring out of labour, personal
tax considerations and what to look out for when structuring contractual
world has become increasingly globalised, and cross-border mobilisation is high
on the agenda for many countries and companies. Any multi-national company worth
its salt has a global mobility policy framework in place, which sets out the
parameters for cross-border employment.
parameters are generally underpinned by hiring-out policies, such as assignment
or secondment. Assignments or secondments within the same group of companies
are quite useful. It allows for effective skills transfers, and creates a wider
inner knowledge of the entire business.
natural to initially only consider the human resource related elements of cross-border
employment, but it is important to be aware of critical tax related aspects that
need attention to ensure compliance.
The basics: What exactly is a secondment
essentially means that an individual is deployed from one related employer to
another on a temporary basis. The idea is that the individual goes back to his first
employer at the end of the secondment.
This is generally referred to as the "loaning” of an employee.
secondment agreement generally has three parties, the secondee or employee; the
sending entity or the seconder; and the receiver of the services (referred to
as the "host”).
The arrangement is set up in such a way that the secondee remains the formal
employee of the original employer during the secondment and will, at the end of
the secondment, "return” to the seconder.
In this regard, it is important to distinguish between a contract for services (generally where
one entity agrees to provide a specific service through the use of its own
employees to another entity) or a contract
of services where an employer-employee relationship exists.
General tax rules
terms of the general tax rules, a non-resident who renders services in a
country which has a Double Tax Agreement (DTA) in place, should not be liable
to pay tax in that country, if the non-resident spends one or more periods of
less than 183 days in that country. In order to qualify for the exemption, the non-resident is required to
fulfil the three conditions contained in the dependent personal services article of the treaty
- the individual
must not be present for more than 183 days in the country in which he/she is
temporarily rendering the service;
- the entity at
which the services are being rendered cannot be regarded as the individual’s
individual’s home country employer must not have a permanent establishment in
the other country where the services are being rendered, which bears the costs
of the individual’s remuneration.
From a South African personal income tax perspective, residents are
liable for tax on their worldwide income and capital gains (subject to certain
exclusions), while non-residents only have tax liability on their South African
sourced income. This means that, to the
extent a non-resident renders services in South Africa and meets the conditions
of the DTA [described above], they will not be liable for tax on her income
from employment in South Africa.
The abuse of international hiring-out of
Unfortunately ‘international hiring-out of labour’ is sometimes abused
to avoid paying personal taxes. For example, a local employer may decide to employ
foreign labour for one or more periods of less than 183 days. They do this by
recruiting individuals through a foreign intermediary (i.e. company), which
purports to be the employer and hires out the labour.
This results in the individuals (generally non-tax residents) avoiding
paying tax at source in situations where services are rendered in foreign
countries that have a DTA in place.
The non-resident fulfils the three conditions contained in the dependent personal services article dealing
with income from employment of the relevant DTA and may claim exemption from
taxation in the country where he is rendering the services. Thereby dodging tax in the country that they
originate from, and the country that they were seconded to.
The Organisation for Economic Cooperation and Development (OECD) has
come up with certain criteria to ascertain who the real employer is. This is to
curb abuse in situations where a foreign employee works in another country for less
than 183 days and does not have to pay tax in the source country because they
are seen as being employed by a foreign employer. Where the nature of the work
done by the non-resident indicates an employment relationship with the entity receiving
their services, the following criteria is used to determine whether the
services are rendered in an employment relationship (contract of services) or whether services are rendered under a
contract for the provision of services (contract
- who has the
authority to hire or fire that individual?; and
- who bears the
responsibility for the work produced by the seconded staff? Does the seconding
entity bear the risk and responsibility for the results produced by the
seconded employees and maintain discipline over the seconded employees’
If the entity receiving the services is seen to be the non-resident’s
employer in terms of the DTA, one of the conditions of the dependent personal
services article of the DTA will not be met, and the individual will not be tax-exempt.
South Africa will likely have the right to tax the income earned from the work
that the foreigner did in South Africa, irrespective of whether he spend 183
days or more in South Africa.
This could result in double taxation and subsequent cash flow issues for
the non-resident should he also be held liable for tax in the country where he is
considered to be a tax resident. It is important to note that although South Africa is one of the
non-member economies with which the OECD has working relationships, based on
certain facts and circumstances, the South African Revenue Services may
subscribe to the guidelines issued by the OECD.
In certain circumstances cross-border hiring out may give rise to the
creation of a permanent establishment in the country where the employees are
sent. This can give rise to international tax consequences, specifically in
situations where the sending company provides services through the use of its
the contractual arrangements
The parties to the contractual agreements are
generally a non-resident individual who provides the services, and the home
country employer or intermediary who is required to provide a service or labour
to the host entity.
The contract of employment is formally concluded
between the non-resident and the home country employer or the intermediary. However, the non-resident is expected to work
at the premises of the host entity. Details
of the agreed service deliverables, together with the secondment terms and
conditions, are included in a Services and Secondment Agreement.
the criteria used to determine who the real employer for tax purposes is, the Services
and Secondment Agreement should differ from the how the arrangement between the
parties plays out in reality. It is advisable that the Services Agreement
between the sending and receiving entities should make reference to the
employee selection criteria, supervision, period of the secondment, renewal of
the secondment and notice of termination of the secondment. It should mention that the home country
employer will remain responsible for the performance appraisal of the secondee.
clear that, although there are business imperatives for mobilising a workforce,
this should be considered in light of the personal and corporate income tax
considerations in both countries.
Failure to do so will impede successful cross-border employment.
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This article first appeared on the January/February 2016 edition on Tax Talk.