Another barrier to skills attraction

13 September 2007 PricewaterhouseCoopers

As a result of proposed amendments to the Seventh Schedule of the Income Tax Act, the cost of multinational companies bringing skilled employees to South Africa will increase significantly.

Georgia Frangou, Associate Director, tax services at PricewaterhouseCoopers (PwC), says that currently the value for tax purposes of residential accommodation provided to expatriate employees is, in certain circumstances, zero. This was supported by the decision in a recent tax case. Tax-free residential accommodation is one of the few tax benefits available to expatriate workers in South Africa.

National Treasury and SARS are now of the opinion that the provision which provides the zero value (Paragraph 9(7) of the Seventh Schedule) has been misinterpreted, and that it was not the intention to allow the provision of such a benefit tax-free.

The draft Revenue Laws Amendment Bill, 2007 proposes an amendment so that the zero value only applies in the circumstances where the taxpayer is away from their usual place of residence in the Republic for the purposes of performing the duties of his or her employment. This effectively excludes the zero value where the accommodation is provided to expatriate workers.

One small crumb of comfort is that where the expatriate will be performing duties in South Africa for less than 183 days, the zero value will still be applied, says Frangou.

This amendment will have a major impact on the cost of employing expatriate workers as in many cases, the tax payable in the host jurisdiction is borne by the employer in that host jurisdiction. Even where the expatriate is responsible for SA taxes, certain expatriate benefits such as residential accommodation are provided net of tax.

For security reasons, many expatriates living and working in Johannesburg are provide with accommodation in security estates such as Dainfern where rentals are extremely high. Assume that the rental paid for an average expatriate is R25,000 per month (R300,000 per annum), the additional tax burden will be R200,000 (R300,000 @ 40% and then grossed up as the payment of the tax by the employer is itself a taxable fringe benefit). This makes the total cost to the employer of providing the accommodation R500,000 per annum.

Frangou says that it is difficult to assess what impact this will have on the rental market and on the ability of South Africa to be an attractive location for expatriate workers. Certainly, companies are likely to sharpen their pencils when negotiating rental contracts. Companies may chose to turn their backs on the expensive security estates and provide cheaper accommodation, with the risk that expatriates will be more exposed to the crime industry in South Africa.

It does seem strange that in the skills constrained environment, that Government should be removing the one tax incentive that was available to expatriates (who may well be funding the purchase and operating costs of their residence in their home country whilst they are away). It remains to be seen what the impact of this will be, but it will surely be regarded negatively by investors and multinational companies that already contribute significantly to the country's economy.

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