The work from anywhere double tax headache for South Africans
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By Gabrie Combrinck
As the new workforce continues to work “anytime and anywhere” during the current Covid-19 pandemic, organisations and employees are faced with unexpected challenges in relation to tax, legal and compliance considerations.
Taxation and the complexities that arise from cross border assignments is probably the most challenging for organisations today. Employment income generates a significant part of the tax revenues in most jurisdictions and will be under more scrutiny by Revenue authorities. Existing regulations may not be appropriate in situations where borders have been closed and international travel is prohibited.
Organisations must continue to ensure that the correct tax is being paid in the country where the employee is physically rendering the service, and in the country of assignment where ultimately the employee is being paid. This may create situations where employees have tax obligations in more than one country, in respect of the same income.
Domestic tax regulations may have provisions to deal with the elimination of double tax, however, they may not apply where the taxable income is regarded as source income in the jurisdictions in question.
Similarly, double tax agreements would also consider the possible overlap of tax liabilities and provide ways in which the element of double tax is recovered. Where the tax authorities in each jurisdiction consider that they have the right of taxation, it leaves employers and employees with no solution to the double tax consequences.
The additional tax liabilities are often carried by employers, which will increase project costs and reduce profits, bringing an additional financial burden on already strained businesses.
South African residents on assignment in foreign locations have been able to apply the foreign income exemption provisions, if they spent more than 183 days in any twelve-month period outside South Africa, of which more than 60 days was for a continuous period. Prior to 1 March 2020, this exemption applied to the entire remuneration earned from the foreign services rendered. Effective 1 March 2020 this exemption was limited to a maximum of R1,25 million per annum.
Coupled with the change in legislation, the Covid -19 pandemic has impacted the movement of the South African residents, encouraging most organisations to repatriate their assignees to their home countries. Due to their physical presence in South Africa, the assignees were no longer able to meet the foreign income exemption requirements.
In response to numerous submissions, the South African government made some concessions and the foreign income exemption requirements were reduced by 66 days, in respect of the period South Africa was in lock-down level 5.
South Africans now only need to have spent 117 days outside South Africa in any twelve-month period for the year of assessment 2021, noting that a consecutive period of 60 days still needs to be met.
Is this enough?
South African residents working remotely in South Africa will be taxed on the remuneration earned for the services they perform in respect of their assignment, as it would be regarded as income sourced in South African, giving South Africa the right of taxation.
The assignment country may, in its own interpretation, however, also withhold tax on the remuneration paid to the South African resident, if it is paid through a local payroll. This is regardless of whether the assignment country still enjoys the right of taxation in the application of the double tax agreement.
The outcome of this ‘conundrum’ is ultimately double taxation, and both jurisdictions, South Africa and the assignment country, may not have domestic legislation that will support the elimination of the double taxation.
As an illustration
Before Covid-19 the employee was a resident of country A but exercised employment in country B. Due to the Covid-19 pandemic, the employee started rendering services in country A. Article 15 therefore provides:
If the employee was resident in country B then country B would have taxing rights on the employment income, which relates to the services being physically rendered in that jurisdiction;
If the employee was not resident in country B, and the employment costs are not carried by a PE in country B, then jurisdiction B would most likely lose its taxing rights according to the treaty, if the employee was not physically present for more than 183 days.
Exceptional circumstances call for an exceptional level of coordination between jurisdictions to mitigate the compliance and administrative costs for employees and employers associated with an involuntary and temporary change of the place where employment is performed.
South African residents could find themselves in similar situations.
The South African Income Tax Act does not make provision for foreign tax relief in the case where that income is regarded as South African source. Further, in other African countries, tax is withheld in the country the employee used to work in.
A call for a level of coordination and interaction between the countries in the African continent should be encouraged to resolve these compliance difficulties. With the conclusion of the recent African Union agreements, there is an opportunity to consider these complex tax consequences to aid the South African organisations and their resident taxpayers.
Gabrie Combrinck works at South Africa Tax Advisory Team