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Foreign employment income, foreign employees and employees' tax - some important considerations

05 June 2017   (0 Comments)
Posted by: Author: Louis Botha
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Author: Louis Botha

In the 2017 Budget, the Minister of Finance announced that the exemption for foreign employment income that is currently provided for in terms of s10(1)(o) of the Income Tax Act, No 58 of 1962, would be reviewed and potentially amended.

We reported on this in our Special Edition Budget Speech Tax and Exchange Control Alert on 22 February 2017. While there will be more clarity on this issue when the proposed draft legislation is released later this year, there are some other issues which employers and employees should also consider in setting up their employment operations.

An interesting issue in this regard: the question of an employer’s duty to withhold employees’ tax, as discussed in Issue Two of Interpretation Note 16 (IN 16), which deals with the exemption of foreign employment income in terms of s10(1)(o) of the Income Tax Act. Furthermore, how much withholding tax should an employer withhold where a non-resident employee renders services in South Africa?

An interesting issue in this regard: the question of an employer’s duty to withhold employees’ tax, as discussed in Issue Two of Interpretation Note 16 (IN 16), which deals with the exemption of foreign employment income in terms of s10(1)(o) of the Income Tax Act. Furthermore, how much withholding tax should an employer withhold where a non-resident employee renders services in South Africa?

The legal principles

In terms of s10(1)(o)(ii) of the Act, certain types of remuneration that a person receives or that accrues to a person for services rendered outside South Africa, will be exempt from income tax in South Africa provided that the following two requirements are met:

·         the person spent at least 183 days outside South Africa during any 12-month period; and

·         during that 12 month period, the person spent at least 60 days continuously outside South Africa.

The Fourth Schedule to the Act (Fourth Schedule) defines remuneration broadly. It includes other types of remuneration not referred to in s10(1)(o)(ii). Paragraph 2 of the Fourth Schedule states that every employer who is a resident or representative employer (in the case of an employer who is not a resident) who pays or has to pay amounts that fall within the definition of “remuneration”, must deduct and withhold employees’ tax.

In terms of paragraph (ii) of the “gross income” definition in s1 of the Act, where a person is not a resident, only the amount received by or accrued to that person from a source within the Republic forms part of that person’s gross income. If a person is not a South African for tax purposes and received remuneration from a South African company, one would have to look at where the services are rendered. Only to the extent that the services are rendered in South Africa, will the remuneration be received from a South African source. For example, if a non-resident employee receives remuneration from a South African resident employer and he spent 100 days of the year of assessment in South Africa in rendering the services, only that portion of his remuneration must be included in his gross income.

In terms of s10(1)(o)(ii) of the Act, certain types of remuneration that a person receives or that accrues to a person for services rendered outside South Africa, will be exempt from income tax in South Africa provided that the following two requirements are met:

  • the person spent at least 183 days outside South Africa during any 12-month period; and
  • during that 12 month period, the person spent at least 60 days continuously outside South Africa.

The Fourth Schedule to the Act (Fourth Schedule) defines remuneration broadly. It includes other types of remuneration not referred to in s10(1)(o)(ii). Paragraph 2 of the Fourth Schedule states that every employer who is a resident or representative employer (in the case of an employer who is not a resident) who pays or has to pay amounts that fall within the definition of “remuneration”, must deduct and withhold employees’ tax.

In terms of paragraph (ii) of the “gross income” definition in s1 of the Act, where a person is not a resident, only the amount received by or accrued to that person from a source within the Republic forms part of that person’s gross income. If a person is not a South African for tax purposes and received remuneration from a South African company, one would have to look at where the services are rendered. Only to the extent that the services are rendered in South Africa, will the remuneration be received from a South African source. For example, if a non-resident employee receives remuneration from a South African resident employer and he spent 100 days of the year of assessment in South Africa in rendering the services, only that portion of his remuneration must be included in his gross income.

Please click here to read more.

This article first appeared on cliffedekkerhofmeyr.com.


 

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