Nonexecutive directors paying double tax: your troubles may soon be over
13 June 2016
Posted by: Author: Amanda Visser
Author: Amanda Visser (BDlive)
The tax treatment of nonexecutive directors’ fees has led to instances of double taxation with the fees subject to both employees’ tax and Value Added Tax.
The National Treasury raised the issue in the February budget, promising to investigate the issue in order to provide clarity.
The South African Institute of Tax Professionals (SAIT) has suggested that all directors be placed solely within the pay-as-you-earn (PAYE) system, and that they be completely excluded from the Value Added Tax (VAT) system.
SAIT said in its submission to the Treasury that most directors do not view themselves as running an enterprise that requires them to comply with VAT obligations.
"VAT registration can also be a cumbersome process for independent directors that work only occasionally throughout the year," SAIT said in the submission.
The institute also raised doubts about amounts of revenue collected when taking account of the enforcement cost for the South African Revenue Service (SARS).
Executive directors are typically also employees of a company, while nonexecutive directors are not. Some nonexecutive directors may even by retired while others are acting as directors in addition to other forms of consulting work.
Cliffe Dekker Hofmeyr tax director Ruaan van Eeden says as a general principle, where an amount is paid to an individual (for example a nonexecutive director) who is not regarded as an employee of the company, the individual must levy VAT on the services he supplied. In order to levy the VAT, the individual must be registered as a VAT vendor.
In addition, PAYE must be withheld from the amount that was charged by the independent director.
Where an individual is not regarded as independent, the services would likely fall outside the definition of an "enterprise" and no VAT would therefore be applicable, Van Eeden said earlier.
The Treasury said in February that views differed on whether PAYE should be deducted from directors’ fees or the director should be registered as a VAT vendor.
Van Eeden expected that the definition of "enterprise" in the VAT Act would be refined to hopefully put the issue to bed. The question is whether VAT registration would be required for a nonexecutive director who is subject to PAYE, but remains independent (not an employee).
SAIT said that if all directors are placed solely within the PAYE system, both enforcement and compliance will improve.
It is fairly easy for the company to withhold PAYE, and much easier from a SARS and director compliance perspective.
"Most directors will find the mechanism easier than the current potential VAT risk. Collections will probably increase due to the reduced risk of tax evasion," the institute said.
This article first appeared on bdlive.co.za.