According to Webber Wenzel’s tax specialist Joon Chong, it appears that the Ministry of Finance and the South African Revenue Service (SARS) may eventually require foreign employers to register as “employers” with the IRS.
“The global trend of remote working, which has increased sharply since the Covid-19 lockdowns, is enabling employers at one end of the world to hire South Africans they may never have met in person,” said the tax expert.
“These schemes benefit both employers – as they may be able to hire highly skilled workers at a lower cost than in their home country – and workers – who can broaden their opportunities for income.”
However, there are currently some inconsistencies in the law regarding foreign employers’ obligations, Chong said.
Annex C of the 2023 Budget Review proposes to align the employer registration requirements for foreign employers to ensure that these rules are consistent for both resident and foreign employers.
“Currently, a foreign employer who does not have a ‘representative employer’ in South Africa with the authority to pay benefits does not have to deduct PAYE from the amounts it pays to South African employees, as these individuals will pay the income tax due as provisional taxpayers. .
“The budget noted that if the foreign employer pays wages – even though it is not required to withhold PAYE – it still has to pay the 1% Skills Development Levy (SDL) and Unemployment Insurance Fund (UIF) contributions, and many do too,” Chong said.
However, a South African employer must register as an employer, withhold PAYE from remuneration paid or payable to employees and pay the SDL and UIF contributions to SARS.
The budget now proposes to align provisions on foreign employers to ensure consistency between resident and foreign employers.
“It remains to be seen around July 2023 when the draft 2023 tax law amendment bill is usually circulated for comments on how the proposed amendment will be worded.
“In our view, the proposed change is likely to require foreign employers to register as ’employers’ with SARS and be responsible for all PAYE, SDL and UIF due on benefits paid or payable to ’employees’ and their related payroll compliance. obligations,” Chong said.
Practical problems
This change would lead to some practicalities that need to be taken into account, according to the tax expert.
To register as an ’employer’ with SARS, a foreign employer currently needs, among other things:
a CIPC registration number; the SARS income tax registration number; and an SA bank account.
“A foreign employer who is a foreign company may not have registered as an ‘external company’ with the CIPC, although it must be done within 20 working days of entering into an employment contract. It will then not have a CIPC registration number,” she said.
The CIPC automatically issues a SARS Income Tax Registration Number upon completion of a foreign company’s external business registration. Therefore, unless the foreign employer registers separately for income tax purposes, the foreign employer will not have a SARS registration number if it does not register as an external company.
“A foreign employer is also not allowed to have a CIPC number because it is not a company but a foreign trust, partnership or foundation. We expect that the foreign employer will not be required to provide a CIPC number by SARS in this situation as it is not an outside company,” she said.
The foreign employer must not have a South African bank account.
SARS accepts foreign bank accounts when foreign suppliers and intermediaries of ‘electronic services’ register for VAT. “Perhaps a similar concession will be available to foreign employers in the proposed alignment, and SARS will accept foreign bank accounts for a foreign entity to register as an ’employer,'” Chong said.
Another situation may arise where the foreign entity has no employees, but natural persons established in the SA who provide its services as independent contractors.
“The foreign entity then usually does not have to register as an external company with the CIPC, as it has no employment contracts. In our view, therefore, the foreign entity should not be required to register with SARS as an ’employer,'” she said.
In particular, once the proposed alignment becomes effective, a foreign entity registered as an “employer” with SARS will be required to comply with all payroll obligations, including filing all returns and tax certificates by the relevant deadlines .
Possible solution
According to Chong, a possible solution for the foreign employer regarding SA payroll compliance obligations is to use a payroll company as a registered employer in South Africa.
The payroll company usually has an international network of existing EWC companies in various jurisdictions, including South Africa. Ideally, the network of existing EWC companies (including the EWC entity in South Africa) would be wholly owned by the EWC parent entity.
The SA employee is employed by the foreign employer and the SA EWC company.
The SA EWC company is the legal employer in the country responsible for compliance with all SA employment laws. The employee will be on the payroll of the SA EOR company and this company will pay all payroll taxes due to SARS.
However, the foreign employer remains responsible for the day-to-day supervision and supervision of the employee. Any employment and work-related decisions are still made by the foreign employer.
“The EWC scheme is helpful for multinational companies to contract and deploy individuals where required within days without having to go through the process of registering a subsidiary or branch in the country of deployment and all related registrations with the tax authorities in those countries.” Chong said.
“This arrangement may provide an efficient solution in light of the proposed budget changes for foreign employers.”
By Joon Chong, tax specialist at Webber Wenztel
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