Employers have seen an increase in demand for international remote working arrangements having various different tax consequences for both employees and employers, says Jenny Klein and Megan Stuart-Steer, legal associates for ENSafrica.
The legal experts said that tax implications vary based on whether employees work in South Africa for a foreign employer or employees work abroad for a South African employer. They noted, however, that there are certain key issues that are common to these scenarios.
Employees tax compliance
An important practical issue for both the employer and the employee is whether and in which jurisdiction/s employees’ tax withholding and tax compliance obligations may arise, said ENSafrica.
The legal experts said that such considerations often depend on the location and the duration that an employee has rendered services. On top of the location and time spent, the provisions of any double tax treaty concluded by South Africa and the foreign country are taken into account.
ENSafrica also noted that a change in the employee’s tax residence status as a consequence of the remote working arrangement might impact the employer’s tax withholding obligations.
According to ENSafrica, where more than one jurisdiction requires the withholding of employees’ tax – this would result in a dual withholding obligation for the employer and a cash-flow issue for the employee, depending on the relevant local legislation and potential refunds.
“Other relevant considerations include the situation where remuneration is paid to an employee by different employers in different jurisdictions, and remuneration – such as a bonus or share incentive payment – payable to the employee relates to services rendered in different jurisdictions,” said ENSafrica.
In respect of employees relocating, it will be necessary to determine whether they will cease to be tax residents of a particular jurisdiction as a result of their relocation and, if so, when this will occur, said ENSafrica.
This is usually a factual enquiry based on various factors and will depend on the individual’s personal circumstances, they added.
If it is determined that the employee will cease to be a tax resident, other timing and disposal rules apply.
Corporate income tax
Where an employee works abroad, a key consideration from a corporate income tax perspective is whether the activities of that employee in the foreign country could create a taxable presence for the employer, said ENSafrica.
ENSafrica said this would most likely be the case if:
- The employer is regarded as carrying on trade or business in the foreign country through a permanent establishment situated in the country – in which the profits of the employer which are attributable to that permanent establishment may be taxed there, or;
- The employer may be regarded as a tax resident in that country, usually due to its place of effective management shifting to the jurisdiction – in which it may be fully taxable there.
“Determining whether such a taxable presence may arise for the employer would typically depend on the role and activities of the employee, the domestic law of the country concerned as well as the provisions of any double tax treaty concluded between the relevant countries, if applicable,” said the two associates.
South Africa is also set to have a new additional consideration for taxing certain employees, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profiting Shifting (MLI). This additional requirement will work alongside provisions that prevent double taxation.
Commentary from legal experts from ENSafrica – Jenny Klein (Principal Associate) and Megan Stuart-Steer (Senior Associate)
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