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Non-resident Independent Contractors: Deducting PAYE

Wednesday, 01 August 2007   (0 Comments)
Posted by: Author: Andrew Wellsted
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Non-resident Independent Contractors: Deducting PAYE

It is becoming increasingly common for local companies to source skilled personnel from abroad and it is therefore necessary for such companies to determine whether Pay As You Earn (PAYE) is required to be deducted from payments to non-resident contractors and consultants. 

Unfortunately for employers, interpreting the relevant tax legislation is difficult because the law is highly technical and somewhat convoluted. The problem is exacerbated by the law having been very broadly framed in order to bring as many people within the PAYE net as possible.

Broadly speaking, PAYE is deductible when an employer pays remuneration to an employee, all of which are defined legal terms.But given that we are dealing with non-residents, how is it that the PAYE provisions are applicable at all?

What is a source?

Persons who are not tax-resident in South Africa are only taxable on amounts earned from a source within South Africa. A detailed discussion of how to determine the source of income is the subject matter of an article for another day. For the moment, it can be accepted that income earned by a non-resident from services rendered within South Africa will be derived from a South African source.

A non-resident service provider will generally either be a natural person acting in his/her personal capacity, or an incorporated entity such as a company. It is clear from what is said above that, where a nonresident provides services to a South African business, PAYE will not be an issue unless the services are provided within South Africa and that non-resident falls into the definition of an employee, which is very broad indeed.

As regards natural persons, the definition of employee applies to any person receiving remuneration. The definition of remuneration excludes any amounts paid for services rendered by an independent contractor.The question is thus: Is the person in question providing services as an independent contractor or as an employee?

Employee vs independent contractor 

Where non-resident natural persons receive remuneration, however, the legislation provides that they will always fall into the definition of an employee, despite being independent contractors.The upshot of this is that there is always an obligation to deduct PAYE from amounts paid to non-resident natural persons rendering services in their personal capacities.

Double tax treaties

The Income Tax Act, however, must be read together with the provisions of any double tax treaties (DTTs) which may be applicable.Most DTT's concluded by South Africa stipulate that non-resident natural persons providing independent personal services from a fixed base available to them in South Africa, will be subject to tax in South Africa.However, even if a DTT appears to place a non-resident natural person outside of the South African tax net, on a technical reading of the PAYE provisions, PAYE must still be withheld unless the Commissioner grants authority to the contrary.  

What this means is that an employer engaging nonresident natural persons in their independent personal capacities to provide services in South Africa must obtain a directive from the Commissioner relieving that employer from the obligation to deduct PAYE.Whether this is being done in practice is, in my view, doubtful.

Where the non-resident service provider is a company, the Income Tax Act does deem certain types of companies to be employees, specifically labour brokers and personal services companies.

If a non-resident company cannot satisfy the local employer company that it does not fall within the definitions of a labour broker or a personal service company, the employer is obliged to withhold PAYE on amounts paid to that non-resident company.Again, if a treaty provides protection to that company, it should be possible to get a favourable directive from the Commissioner.

Permanent establishment

A final consideration with regard to non-resident companies is whether or not they have a permanent establishment, as defined, in South Africa. In terms of the Organization for Economic Co-operation and Development guidelines, if a non-resident company sends an employee to provide services to a local business, and that employee has a fixed place of business from which to operate, that non-resident company may be deemed to have a permanent establishment in South Africa with the result that the income arising in relation to that permanent establishment will be taxable in South Africa.

This does not necessarily mean that PAYE needs to be deducted, but merely that the non resident company must be aware of its obligations to pay South African tax on the income earned here. There may also be VAT implications for both non-resident companies and independent contractors, but that is another matter.

Source: By Andrew Wellsted (TaxTALK)



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