The National Treasury’s proposals in the February 2023 budget indicate its intent to align obligations for South African and foreign employers, affecting businesses hiring local talent for remote work. Joon Chong, a tax specialist at Webber Wentzel, notes that Treasury and the South African Revenue Service (SARS) may require foreign employers to register as “employers” with the revenue service due to the global remote working trend spurred by the Covid-19 pandemic.
Remote work arrangements benefit both employers and employees by allowing companies to hire highly skilled workers at lower costs and giving employees access to more income opportunities. However, inconsistencies in current legislation covering foreign employers’ obligations need to be addressed, Chong says.
Annexure C of the Budget Review 2023 aims to align employer registration requirements for foreign employers to ensure consistency between resident and foreign employers. Currently, foreign employers without a “representative employer” in South Africa aren’t required to deduct PAYE from amounts paid to South African employees, who instead pay the income tax as provisional taxpayers.
Despite not being required to deduct PAYE, foreign employers still need to pay the 1% Skills Development Levy (SDL) and Unemployment Insurance Fund (UIF) contributions. In contrast, South African employers must register as employers, deduct PAYE from employee remuneration, and pay SDL and UIF contributions to SARS.
The budget proposes aligning provisions on foreign employers to ensure consistency between resident and foreign employers. The draft Taxation Laws Amendment Bill for 2023, expected to be circulated for comments in July 2023, will reveal the proposed amendment’s wording. Chong believes the amendment will likely require foreign employers to register as “employers” with SARS and be accountable for all PAYE, SDL, and UIF due on remuneration paid to “employees” and their related payroll compliance obligations.
The proposed change would bring up some practical issues that need to be considered, Chong explains. To register as an “employer” with SARS, a foreign employer currently requires a CIPC registration number, a SARS income tax registration number, and a South African bank account. However, foreign employers may not have a CIPC registration number or a SARS income tax registration number if they haven’t registered as an external company. Additionally, foreign employers may not have a South African bank account.
SARS may need to make concessions, such as accepting foreign bank accounts, for foreign entities to register as “employers,” similar to when foreign suppliers and intermediaries of “electronic services” register for VAT. Furthermore, Chong anticipates that foreign entities providing services through independent contractors instead of employees should not be required to register with SARS as “employers.”
Once the proposed alignment is in effect, foreign entities registered as “employers” with SARS will be required to meet all payroll compliance obligations, including submitting all returns and tax certificates by the relevant deadlines.
Chong suggests that a possible solution for foreign employers to navigate South African payroll compliance obligations is to engage a payroll company as their employer of record (EOR) in South Africa. Payroll companies typically have an international network of existing EOR companies in various jurisdictions, including South Africa, and are ideally wholly owned by the EOR parent entity.
Under this arrangement, South African employees would be co-employed by the foreign employer and the South African EOR company. The South African EOR company would be the legal in-country employer responsible for complying with all South African employment legislation, managing the employee’s payroll, and accounting for all payroll taxes due to SARS. Meanwhile, the foreign employer would retain responsibility for day-to-day supervision and control of the employee, as well as making employment and work-related decisions.
Chong highlights that EOR arrangements allow multinationals to efficiently contract and deploy individuals without needing to register a subsidiary or branch in the country of deployment or deal with related registrations with revenue authorities in those countries. This arrangement could offer a practical solution in light of the proposed amendments affecting foreign employers in the Budget.