In this week’s newsletter, we highlight another important proposal to amend the Income Tax Act 58 of 1962 (“ITA”) that aims to bring non-resident employers into the South African employees’ tax net. This proposal is encapsulated in the 2023 draft Tax Administration Laws Amendment Bill (“TALAB”) as published on 31 July 2023.
Impact of the Proposed Amendment
At present, the responsibility to deduct Pay-As-You-Earn (“PAYE”), along with making contributions to the Unemployment Insurance Fund (“UIF”) and the Skills Development Levy (“SDL”) and remit them to the South African Revenue Service (“SARS”), generally only falls on resident employers, i.e. on SA employers.
However the proposed amendment will now also result in any non-resident employer who pays remuneration (including various non-cash benefits) to an employee in South Africa being obligated to register with SARS and deduct PAYE, UIF, and/or SDL on amounts paid to employees. This is a big deal!
Such registration will become mandatory regardless of whether the foreign employer has a taxable presence in the country, so even if the employer has no office in SA but just employs SA staff it will have to register with SARS! Failure to do so could result in the non-resident employer being liable for the relevant tax along with penalties and interest. Foreign employers with no income tax or value-added tax presence in South Africa could thus still be “caught” by the proposed amendment.
Many comments have already been published regarding the significant administrative requirements that foreign companies will face, including registering their employees for payroll tax purposes with SARS, reconcile the monthly deductions by submitting monthly EMP201 returns, bi-annual EMP501 forms, and to issue tax certificates (“IRP5s/IT3(a)s”) detailing their annual income, deductions, and other relevant tax information.
Care should also be taken by the employees when completing their tax returns going forward as SARS may deny a claim for certain expenditure in respect of taxable income now linked to employment.
Further Tax Compliance
Although the liability for payroll tax is primarily an employer’ obligation, and SARS typically pursues the company itself for any payroll tax owed, it is important to note that the failure to withhold and remit employees’ taxes as required by the ITA can lead to liabilities for both employers and employees. Therefore, it is vital for both parties to understand and meet their tax obligations to avoid unnecessarily incurring penalties and interest.
Furthermore, foreign companies conducting business or executing employment contracts in South Africa should consider the pre-existing requirement to register as an external company as per section 23 of the South African Companies Act 71 of 2008. This may entail additional compliance tasks, including filing of annual returns and beneficial ownership registers with the Companies and Intellectual Property Commission (“CIPC”).
However, it is essential to clarify that structuring contracts as independent contractor arrangements does not automatically exempt foreign companies from their registration obligations as employers.
The proposed amendment seeks to expand the ambit of the Fourth Schedule of the ITA to include any non-resident employer, and this potentially has broad implications for foreign companies. It necessitates careful consideration of compliance requirements, including registration as an external company, filing annual returns and further tax obligations.
Notwithstanding that the new compliance requirements and potential administrative complexities may pose challenges, it is important to emphasise that the proposed amendment (in National Treasury/SARS’ view) are primarily aimed at ensuring tax fairness and enhancing compliance between resident and non-resident employers alike.
If these proposed changes are promulgated, seeking professional guidance, and ensuring full compliance with South African laws is critical for foreign companies to operate smoothly within the country’s evolving tax landscape. We can assist with your company’s registration and on-going tax compliance requirements. If these matters are of interest to you, please do not hesitate to reach out to us.