With technology making the world a smaller place, it is understandable that large corporations expand their businesses into multiple jurisdictions as they continue to grow. However, setting up a new operation for an existing business in a foreign jurisdiction is not necessarily an easy task. A common practise that is adopted to promote the success of a business as a whole is to draw on the expertise of experienced staff that have been working for the established international entities. With this approach, a business can readily draw on people with specialised product and company knowledge or skills.
The concern that often comes to light is that a host country employer, in respect of the expatriate employee, is often not aware of the potential true cost of that resource, especially where they are sent on very favourable terms to convince them to carry out the assignment.
As the expatriate employee would normally remain a tax resident of their home country, they would be seen as a non-resident in South- Africa for tax purposes.
In terms of South African tax legislation, a non-resident of South Africa would only be subject to tax in South Africa on their income that has, or is deemed to have, its source within South Africa. Therefore, as the expatriate is physically present in South Africa rendering their services, their remuneration and benefits received would be seen as taxable in South Africa even though they may be factually paid in their home country.
What is a common arrangement is for the employer to agree that the employee is in a tax neutral position. This would mean that the employer would settle any taxes due and payable in the host country. This in itself creates a fringe benefit in South Africa as the employer is effectively settling an employee debt.
However, a situation arises whereby every time the employer settles any tax liability due on behalf of the employee, a further fringe benefit arises. SARS (South African Revenue Service) has accepted a certain formula to be applied to the liability to mitigate this occurrence. You would effectively gross up the fringe benefit to ensure the total tax liability is settled.
The scenario of calculating the true cost to the employer, namely to gross up the value of the benefits for the taxes paid, is perhaps better illustrated with an example:
Company ABC Plc sends an employee to their South African subsidiary, DEF (Pty) Ltd for a year. He receives a net salary of R700,000 annually and the employer pays him a hardship allowance of R100,000. This results in a PAYE liability (Pay As You Earn) due to SARS of R235,797. DEF (Pty) Ltd agrees to settle this tax liability, but creates a further fringe benefit of R399, 655.93.
The total cost to company for the example would be R1,199,655.93, consisting of the following:
- Remuneration - R700,000.00
- Hardship allowance - R100,000.00
- Employee debt fringe benefit - R399,655.93
It is therefore evident that the true cost of employing an expatriate in South Africa can be a lot higher in certain situations than initially anticipated, and is not always considered by employers before it is too late.
It should be clear that the taxation and employment of expatriate employees is a complex matter. Therefore, we encourage international companies to obtain in-country tax advice before any decisions are made for an international assignments so as to determine the true cost of employment for the expatriate employee, as well as the implications that may exist for that individual.