PAYE obligations for Foreign Employers
Following the 2023 National Budget on 21 February 2023, draft legislation was published on 28 July 2023 where it was proposed by National Treasury (NT) that all foreign employers would be required to register for Employees Tax (PAYE) and make the necessary payments to the South African Revenue Service (SARS) in respect of remuneration paid to any employees located in South Africa (SA).
Many commentators including PKF made submissions and engaged in the stakeholder meetings with NT advising that this would significantly increase the administrative burden on foreign employers and potentially increase unemployment levels in SA as foreign employers would look to employ personnel in other countries.
Following this process, the final legislation was promulgated, and this new law was revised to only apply to foreign employers who have a "permanent establishment" (PE) in SA. The effective date of this new legislation is 22 December 2023, resulting in the first PAYE obligation to be in relation to remuneration paid or payable on or after 22 December 2023 may result in certain foreign employers currently being non-compliant for PAYE purposes.
This non-compliance is mainly attributable due to the fact that a reasonable number of foreign employer/s having to first determine if their operations/or employees located in SA would constitute the foreign entity having a PE in SA as would then lead to the said PAYE obligation.
The Income Tax Act definition of a PE makes reference to the definition contained in Article 5 of the OECD guidelines and Model Tax Convention on Income and Capital. A general definition of a PE is provided, as being a fixed place of business through which the business of an enterprise is wholly or partly carried.
Based on this general definition most foreign entities would assume that in order to have a PE in SA it would be operating a branch in SA (e.g., It has an office/premises located in SA with personnel that operate from such location and regular business transactions are undertaken which causes a PE to arise).
The PE definition however extends much wider than that and can arise in instances that would not ordinarily seem like a PE for example:
- A senior level employee working from their home office located in South Africa and part of that employee's job description may include the signing powers to enter the foreign company into contracts etc.
- A construction project that is ongoing for at least a period of 6 months
- A foreign company that rents storage property in SA to import and temporarily store goods that it has already sold to SA customers (pre-ordered before exporting to SA). This company may regard itself as merely a distributor and doing business with SA customers as opposed to carrying on a business in SA as the majority of the functions relating to the transaction are undertaken abroad and it merely has one employee located in SA to assist with distribution.
The application of the PE principle in relation to foreign employers is complex and requires a thorough analysis of the relevant Double Taxation Agreement and potentially the multilateral agreement applicable in respect of the foreign company's tax jurisdiction and SA, as well as the proper understanding of all the facts. Hence there is no general rule, and each case would have to be assessed separately by a qualified tax professional to make this determination.
It is recommended that foreign employers should not rush to register for PAYE, unless they are certain that they have a PE (e.g., A fully operational branch) in SA but should obtain a tax opinion to confirm their position and thereafter undertake a PAYE registration, if applicable.
In circumstances where a foreign employer obtains a tax opinion that confirms that the foreign company does have a PE in SA, but has not registered for PAYE with SARS, this non-compliance may be remedied. One of the remedies, which can minimize or eliminate potential penalties is the utilization of the Voluntary Disclosure Programme (VDP) that SARS has available.
The VDP process has strict criteria in order for the application to qualify, hence professional tax advice should once again be sought in this regard.
Should you require assistance or have any queries regarding this new PAYE obligation for foreign employers please contact your nearest PKF Office for further information.