In a previous newsletter, we explored the potential value-added tax (“VAT”) liabilities that may arise when expatriate employees are sent to provide services in a foreign jurisdiction.

This week we delve into a compelling tax case which saw those potential VAT liabilities becoming a reality. The case revolves around an application launched by Citibank, N.A., a South African branch of a US incorporated entity and part of the Citigroup Inc (“Citigroup”), and Citigroup Global Markets (Pty) Ltd, a wholly owned subsidiary of Citigroup Financial Products Incorporated (USA) (collectively called “Citigroup SA”) which was contested by the South African Revenue Service (“SARS”).


Citigroup, a global financial conglomerate, routinely seconded employees to its various international entities, including Citigroup SA, by concluding assignment and intra-city service agreements (“the agreements”) with these respective international entities.

In this matter, Citigroup SA sought a court order declaring that payments it made to the Citigroup foreign entities, in relation to seconded employees, comprised the reimbursement of salary costs paid to Citigroup SA’s employees on Citigroup SA’s behalf, which fell outside the scope of VAT, and which were exempt from section 7 (1)(c) of the VAT Act No 89 of 1991, in terms of section 14 (5) (d) of the VAT Act.

SARS, on the other hand, argued that payments made by Citigroup SA for foreign staff seconded to South Africa should be categorised as payments for an “imported service” rather than a mere reimbursement of costs to the foreign entity.

In simpler terms, “imported services” as defined in the VAT Act, refer to services provided by a supplier or business located outside of South Africa to a recipient within South Africa. These services are subject to VAT if they are used or consumed within South Africa and are not used to make taxable supplies.

Given the nature of its business as a bank, Citigroup SA would generally be required to apportion its input claims. It follows that the payments made to other Citigroup entities abroad are thus partly used, and partly not used, to make taxable supplies.

Citigroup SA’s Argument

Citigroup SA contended that the seconded employees were their employees, since the seconded employees placed their productive capacity at their disposal and furthered the enterprise of Citigroup SA, and furthermore, that Citigroup SA exercised the right of supervision and control over the seconded employees for the duration of their secondment. They also maintained the position that the payments made to the foreign entities for the supply of services to Citigroup SA, should not be subject to VAT.

It is important to note that the liability to pay VAT is exempt under proviso (iii)(aa) of the definition of “enterprise” in the VAT Act, which states that no VAT is payable for the rendering of services by an employee to his employer in the course of his employment.

On that basis, Citigroup SA were accordingly of the view that these services provided by the seconded employees were like those of regular employees and did not constitute “imported services” as defined in the VAT Act.

SARS’s Standpoint: VAT on Imported Services

SARS disputed the classification of these seconded individuals as employees of Citigroup SA and that the foreign entity paid the salaries of these individuals on behalf of Citigroup SA, with Citigroup SA subsequently reimbursing the foreign entities. In terms of SARS’ interpretation, the payments made by Citigroup SA under the agreements were seen as payments made to a service provider (the foreign entity) for services rendered via the seconded employees.

This categorisation was pivotal since, because the payments were, according to SARS, payment for services. SARS consequently sought to charge VAT on the basis that they were payments for “imported services.”

Citigroup SA’s obligation to make payments to the foreign entities stems from a careful reading of both the assignment agreement and the inter-city agreement. The assignment agreement explicitly stated that the seconded employees’ services are “lent” to Citigroup SA by the foreign entity, with the seconded employees retaining their status as employees of the foreign entity. The assignment agreement also referred to a profit margin being levied on the service which arguably undermines Citigroup SA’s contention that its payments abroad only amounted to remuneration paid (indirectly) to the secondees.

The Court’s Decision and Reasoning

Following the arguments raised by Citigroup SA and SARS, the court then considered whether the seconded employees could, indeed, be classified as employees of Citigroup SA.  The court agreed with SARS’s view that the issue as to whether the secondees were employees should be determined under South African tax legislation, rather than under the South African labour laws.

The court also considered the definitions of “employer” and “employee” as provided for in the South African Income Tax Act 58 of 1962 (“ITA”). According to the Fourth Schedule to the ITA, an “employee” is any natural person who receives remuneration. “Remuneration” includes various forms of compensation, such as salaries, wages, bonuses, commissions, etcetera.

In determining whether section 7(1)(a) applied, and whether the exclusion to section 7(1)(c) applied, the court analysed the wording of proviso (iii)(aa) to the definition of an “enterprise” (in other words, the provision of services by an employee to his employer), in the context of these income tax definitions.

At the end of the day, the court ruled against Citigroup SA and this decision ultimately hinged on the failure of Citigroup SA to discharge the burden of proof on two crucial aspects: 1) that they were the “employers” of the seconded employees as defined by the ITA; and 2) the payments they made to the foreign entity constituted “remuneration.”

On the first point, the court held that Citigroup SA had not provided compelling evidence to establish that the seconded employees were under their direct supervision and control. It noted that Citigroup SA’s assertion of supervision and control merely recited statutory language without demonstrating the practical aspects of such control over the seconded employees.

Circling back to the issue of payments, the court found that Citigroup SA had not shown that these payments constituted “remuneration” as defined in the ITA. The fact that the foreign entity, as per the agreements, remained responsible for the salaries of the seconded employees, was a significant point of consideration. In that regard, the court held that the evidence of issuing IRP 5 tax certificates alone was not compelling enough to establish that these payments constituted remuneration.

The Takeaway

This case has significant implications for international businesses operating in South Africa and is a prime example of how intricate tax regulations can lead to contentious disputes.

Further, the judgment underscores the intricate challenges faced by multinational corporations dealing with tax regulations, both local and international. The outcome of this case could set a significant precedent, affecting how businesses structure their cross-border employment arrangements and navigate complex tax laws. It further demonstrates the need for taxpayers to seek clarity and consistency in international tax laws when dealing with increasingly common global employment arrangements.

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Today’s newsletter was written by Jaco Jansen van Vuuren, a Corporate Tax consultant based in Johannesburg. Contact Jaco at