Working in South Africa: The Tax & Fiscal Implications

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South Africa is one of the expatriate jurisdictions where proactive planning makes a significant difference to the tax and exchange control implications of an international mobile employee. The primary reasons are:

  • Unlike most other countries, with good planning, you only become ‘tax resident’ in the beginning of your sixth year in South Africa; and
  • There are various tax provisions which provide specific tax relief for expatriate employees, as well as various South African Revenue Service (SARS) practice notes and binding rulings that gives additional relief.

Typical mistakes you should avoid:

The following are examples of things that may sound like a good idea, but, from a South African tax perspective, is not:

  • Open ended contracts and applying for permanent residency too soon. These are examples of items which SARS and the South African Reserve Bank often use to determine whether you have an intention to reside permanently in South Africa thus making you ordinarily resident and therefore, tax resident in South Africa. Not only will you then be liable to tax in South Africa on world-wide income, but you will also be subject to South African exchange control regulations. We have in recent months defended expatriates who SARS held to be tax resident in South Africa on the basis of an open ended employment contracts. Good planning would be entering into a fixed term contract with the option to renew.
  • Housing or accommodation related allowances are never good ideas because they are fully taxable with no tax relief. Company provided accommodation either directly or through outsourced provider qualifies for various exemptions.
  • Expatiates based in South Africa but who travels internationally qualifies for various exemptions. Whilst the principles are complex and there is no ‘one-size –fits-all’, it dates back to 1946 and states that days worked outside South Africa by a non-resident is exempt from South African tax.

A word of caution:

Whilst South African tax law has favourable provisions for expatriates, SARS has a dedicated audit focus on expatriates, for example, in the SARS standard payroll questionnaire, there is an entire section dealing with expatriates to ensure correct treatment and to identify abuse of favourable provisions.

The rule of thumb is that the employment contract or secondment agreement should be optimally structured from a tax perspective. This must be done before the work permit application.

Information provided by www.taxconsulting.co.za

South African VAT, Foreign Companies & Employees

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Foreign companies often need to send employees to South Africa for execution of local contracts or to assist South African group companies for various reasons. While South African income tax considerations, permanent establishment concerns and double tax treaty provisions are often considered in detail, the South African VAT (or ‘goods and services tax’ as it is known in many other jurisdictions) consequences are hardly ever taken into account.

South Africa, unlike many other countries in the world, does not have specific place of supply rules. Rather, South African VAT is collected through the vendor registration method or the reverse charge mechanism for imported goods or services. In this article we will focus on the vendor registration method and the possible registration obligation for foreign companies consequent upon employees operating in South Africa.

The vendor registration method:

The vendor registration method requires of any person (whether local or foreign, resident or not resident) to register for VAT in South Africa if that person carries on an enterprise for South African VAT purposes with past or expected sales exceeding ZAR 1 000 000. Such registration gives rise to regular reporting obligations to the South African Revenue Service (SARS) and failure to report where an obligation to do so exists gives rise to penalties and criminal sanctions.

An enterprise will be carried on for South African VAT purposes if a person conducts any activity in South Africa on a regular or continuous basis and in the course of furtherance of that local activity sells either goods or services. What exactly constitute a continuous or regular activity in South Africa for South African VAT purposes is not entirely clear under South African law and each case needs to be considered on its own facts. SARS have, however, expressed a formal view that short bi-monthly visits to South Africa by more than one employee of a foreign company is sufficient to trigger an obligation on a specific foreign company under consideration to register for South African VAT and report to SARS. Similarly, SARS have expressed a view that short training sessions provided in South Africa on software products of a specific foreign company under consideration by employees of that foreign company is likely to trigger a registration obligation under the vendor registration method and concomitant reporting obligations.

Foreign companies sending employees to South Africa should take care to consider South African VAT implications and are advised to seek advice in respect of same. South African VAT implications are not driven by the existence or otherwise of a permanent establishment in South Africa or any South African income tax obligation. In fact, it often occurs that a foreign company has no South African income tax obligation but indeed has a South African VAT obligation.

Easing Travel Between Kenya & South Africa

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During the Minister of Home Affairs, Malusi Gigaba’s, visit to Kenya in May this year, plans were made to ease travel between South Africa and Kenya. The discussions were sparked when Kenya’s Amina Mohammed, Cabinet Secretary of Foreign Affairs and International Trade, stated that the applications for clearance to travel, which were to be submitted by Kenyans travelling to South Africa, was a “violation of bilateral the agreement between the countries”. In summary of the discussions the following revelations were made –

  • agreed that study visas will be issued for the duration of the candidate’s study;
  • transit visas for Kenyans transiting through South African airports will be scrapped; and
  • ten-year visas with multiple entries for business travellers and academics who are required to travel to South Africa frequently will be issued.

Q&A: Foreign Employee

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Question from Lawrence Thipe

I’m in the ICT sector and need to hire a Foreign Employee from Mozambique. Do you have an idea on what I should do?

Answer

When hiring a foreign national a number of items need to be taken into consideration. The first item to note is to make your offer of employment subject to the obtaining of the necessary work or residency permits.

In this regard, where the candidate is required to enter the country urgently to start working as soon as possible, it is recommended they first apply for a Visitor Visa under Section 11(2) of the Immigration Act of 2002, as amended, which allows the candidate to work for a period of up to three months, and this visa takes 5 – 10 days maximum to obtain. These temporary work permits are obtained hassle-free and is far more preferable that running the risk of being caught as illegally working, arrest for breach of immigration rules etc.

Once done, the candidate may enter the country and start working and you need to start looking at the process of applying for the longer term work visa. The Critical Skills Work Visa is favourable for candidates in the ICT sector and we recommend considering this category first and foremost. We strongly advise against the “General” Work visa category because of the involvement of the Department of Labour which is still at this stage lengthy and often unsuccessful. The candidate will be required to return to Mozambique to apply for the visa and may take 30 days to complete.

In terms of remuneration, the candidate must be paid by South Africa and as such will be subject to South African taxes and in accordance with the double tax agreement between South Africa and Mozambique.

Whilst the employee’s remuneration is subject to tax, there are a number of special planning items that can be considered for expatriate employees, these include tax free accommodation for the first two years and up to R25 000 per month, time outside South Africa is exempt and a log book of travel should be kept to calculate this, one month relocation allowance is exempt, and where he has not worked for the complete year in South Africa a portion of his taxes may be refunded and can be claimed back from SARS on personal tax assessment.

Other items to consider include –

  • Split payroll setup, where a portion of his salary is paid locally and the balance is paid offshore (this is not a tax saving mechanism, but allows employees to receive their money where they need it).
  • A correctly setup South African non-resident bank account.
  • Ideally the candidate should not belong to the South African retirement fund but should rather take out private insurances, including life and disability cover.

There are specialised providers in the market and we can refer you to them, if needed.

Q&A: Foreign Employee

/in /by

Question from Lawrence Thipe

I’m in the ICT sector and need to hire a Foreign Employee from Mozambique. Do you have an idea on what I should do?

Answer

When hiring a foreign national a number of items need to be taken into consideration. The first item to note is to make your offer of employment subject to the obtaining of the necessary work or residency permits.

In this regard, where the candidate is required to enter the country urgently to start working as soon as possible, it is recommended they first apply for a Visitor Visa under Section 11(2) of the Immigration Act of 2002, as amended, which allows the candidate to work for a period of up to three months, and this visa takes 5 – 10 days maximum to obtain. These temporary work permits are obtained hassle-free and is far more preferable that running the risk of being caught as illegally working, arrest for breach of immigration rules etc.

Once done, the candidate may enter the country and start working and you need to start looking at the process of applying for the longer term work visa. The Critical Skills Work Visa is favourable for candidates in the ICT sector and we recommend considering this category first and foremost. We strongly advise against the “General” Work visa category because of the involvement of the Department of Labour which is still at this stage lengthy and often unsuccessful. The candidate will be required to return to Mozambique to apply for the visa and may take 30 days to complete.

In terms of remuneration, the candidate must be paid by South Africa and as such will be subject to South African taxes and in accordance with the double tax agreement between South Africa and Mozambique.

Whilst the employee’s remuneration is subject to tax, there are a number of special planning items that can be considered for expatriate employees, these include tax free accommodation for the first two years and up to R25 000 per month, time outside South Africa is exempt and a log book of travel should be kept to calculate this, one month relocation allowance is exempt, and where he has not worked for the complete year in South Africa a portion of his taxes may be refunded and can be claimed back from SARS on personal tax assessment.

Other items to consider include –

  • Split payroll setup, where a portion of his salary is paid locally and the balance is paid offshore (this is not a tax saving mechanism, but allows employees to receive their money where they need it).
  • A correctly setup South African non-resident bank account.
  • Ideally the candidate should not belong to the South African retirement fund but should rather take out private insurances, including life and disability cover.

There are specialised providers in the market and we can refer you to them, if needed.