True or false: Short-term secondments to SA – tax free?

Some taxpayers are under the impression that expatriates who are assigned to SA for less than six months are not subject to tax on their remuneration packages. Under certain circumstances, these taxpayers may well be correct! Let us briefly explore tax law as it currently stands.

Non-residents are subject to tax only on their SA-source income. In the context of employment income, “source” means that place where services are physically rendered.

However, the employment income clause of a typical double taxation treaty (“DTA”) exempts from SA tax any remuneration paid to a non-resident employee for services rendered in SA, where all three of the following conditions are satisfied:

§ The non-resident is not present in SA for more than 183 days over a 12 month period; and

§ The remuneration is paid by a foreign employer; and

§ The remuneration is not an expense of a permanent establishment (“PE”) of the foreign employer in SA.

If any one of these conditions is not satisfied (e.g. the remuneration is paid by an SA employer), then the non-resident’s remuneration does not qualify for exemption in terms of the DTA.

Scenario 1:

Mr Jones, a UK resident, is seconded by his employer, a UK parent company (“UK Co”), to its SA subsidiary (“SA Co”) for a period of three months. During this time, UK Co continues to pay Mr Jones’ salary and does not recharge it to SA Co. SA Co pays Mr Jones a daily cash allowance for incidentals.

Analysis 1:

The payment of Mr Jones’ salary satisfies all the conditions required for DTA exemption (namely, Mr Jones is renders services in SA for less than 183 days; his salary is paid by UK Co; and his salary is not borne by an SA PE of UK Co) and therefore Mr Jones’ salary is exempt from SA tax. (Whether Mr Jones constitutes a PE of his employer is a difficult question, but he probably does not.)

However, because SA Co (and not UK Co) pays Mr Jones the daily cash allowance, the allowance does not qualify for DTA exemption and may be subject to PAYE withholding if it exceeds the tax threshold.


And what of non-resident employees whose home countries have not concluded DTAs with SA? Unfortunately for these employees, if they render services in SA, SA-source income would accrue to them, and without DTA protection, it would be taxable in SA irrespective of the length of their assignments.

This does not mean that PAYE should always be withheld – a PAYE withholding obligation only arises in the case of an SA-resident employer or representative employer.

These non-resident employees should register as taxpayers in SA. If the non-residents’ countries of residence have similar tax legislation to SA, then these employees might qualify to claim a credit in their home countries for the taxes suffered in SA.

Scenario 2:

Mr Dos Santos, a Venezuelan resident, is seconded by his employer, a Venezuelan parent company (“V Co”), to its SA subsidiary (“SA Co”) for a period of three months. During this time, V Co continues to pay Mr Dos Santos’ salary. SA Co pays Mr Dos Santos a daily cash allowance for incidentals.

Analysis 2:

SA and Venezuela do not have a DTA. Therefore, Mr Dos Santos is liable for tax on his SA-source remuneration, which includes his salary paid by V Co and the daily cash allowance paid by SA Co. Mr Dos Santos should register as a taxpayer with the South African Revenue Service (“SARS”). SA Co would be obligated to withhold PAYE from the daily cash allowance. If SA Co has the authority to pay remuneration on behalf of V Co, then it would be obligated to withhold PAYE from the salary paid by V Co.


Conclusion

Some short-term assignments of less than six months may well be tax-free in SA. However, very specific conditions must be satisfied, including a DTA between SA and the expatriates’ countries of residence.