November 27, 2023
South Africa introduces amendment to employee tax withholding requirement for non-resident employers
On 27 October 2023, the South African Government published The Tax Administration Amendment Bill (the amendment bill), which introduced an amendment to the definition of "non-resident employer" for Employees' Tax (PAYE) withholding requirements.
Non-resident employers who carry out activities in South Africa through a Permanent Establishment (PE) must register and withhold PAYE on remuneration paid. The amendment bill was published in the Government Gazette No. 49576 of 27 October 2023. The expected date of promulgation is not known; however, it is anticipated that the amendment will be effective 1 March 2024.
The South African Income Tax Act places a PAYE withholding obligation on all South African resident entities and representative entities for an employer who is a non-resident entity.
Prior to 27 October 2023, a non-resident entity could appoint a representative South African entity to pay remuneration and manage the PAYE withholding on their behalf. If the non-resident employer did not have a representative employer, no PAYE withholding applied. The employees would be personally responsible for the payment of their own tax liability of South source income, through the provisional tax system.
The non-resident employer, however, was required to contribute to the Unemployment Insurance Fund (UIF) and the Skills Development Levy (SDL), despite not having a local employer registration.
Reasons for the Amendment
The proposed amendment widens the PAYE withholding to include non-resident employers and aligns all employer obligations to the existing requirements to contribute and withhold both UIF and SDL contributions.
The amendment is targeted at non-resident employers conducting business through a PE in South Africa. Non-resident employers will need to establish if a PE has been created through the presence and activities of their employees in South Africa.
In terms of the amendment, a non-resident entity that has a business activity in South Africa through a PE will need to go through an employer registration with the South African Revenue Services (SARS). The registration requirements include the existence of a South African Bank account in the name of the non-resident employer entity and the appointment of a public officer who is a South African resident.
Integrated effects on other taxes
The term "Permanent Establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes a wide interpretation of activities and non-resident employers will need to carefully consider the possibility that their activities in South Africa may have created a PE, as defined. The impact of creating a PE is that it gives the Government of South Africa the ability to tax the profits of the non-resident entity as it relates to the South African activities.
We anticipate that many organizations may be required to register a branch/subsidiary in South Africa if they identify that a PE has been created in South Africa. The branch/subsidiary would likely have a Corporate Income Tax reporting requirement. Furthermore, a value added tax (VAT) registration requirement may be created for the non-resident entity and the VAT registration is not possible without a Corporate Income Tax registration.
Having an employer registration requirement may indirectly impact the way non-resident entities engage with South African employees, making South African employees less attractive in the global market.
Similarly, as South Africa has a large talent gap in certain skills, a resource pool is normally provided by Global Employment entities. Providing resources may be seen as a service from a VAT entity perspective, with consequential VAT implications.
A number of other triggers result from the establishment of a PE, but these may differ on a case-by case basis. Affected entities that carry out the following activities should ensure that the tax consequences have been considered:
The above list is not exhaustive and careful consideration will be required.
Conclusion and takeaway
The amendment is not a mere "textual correction" as it could have other direct obligations for non-resident employers. It is important to note that if a PE has been created, the non-resident entity may in effect be regarded as a resident entity, with potential employees' tax, VAT and corporate tax consequences.
How EY can assist
Contact details are provided below for tax specialist team members who can help analyze the various tax triggers that may apply to applicable non-resident entities.
For additional information with respect to this Alert, please contact the:
Ernst & Young Advisory Services (Pty) Ltd., Johannesburg
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor