Added employment costs and obligations for non-resident employers in South Africa

South Africa applies a residence basis of taxation, subjecting South African tax residents to tax on worldwide income and capital gains, while non-resident taxpayers are subject to income tax on South African source income or income that is deemed to be from a South African source, subject to any applicable double tax treaty (‘DTA’) relief.

Income earned for services rendered in South Africa is generally subject to South African employees’ taxes, which includes income tax known as “pay as you earn” (‘PAYE’), Unemployment Insurance Fund (‘UIF’) contributions and the Skills Development Levy (‘SDL’). PAYE is a withholding tax on employment income which is offset against the employee’s final income tax liability for the relevant tax year.

The obligation to withhold employees’ tax rests on the employer and arises due to the application of the Fourth Schedule of the Income Tax Act, No. 58 of 1962 (the “ITA”). Paragraph 2 of the Fourth Schedule requires every employer who is a resident, or every representative employer in the case of an employer who is not resident, to withhold employees’ tax if they are liable to pay remuneration to an employee. In the case of a non-resident employer, a representative employer is defined in paragraph 1 of the Fourth Schedule as an agent of that employer with the authority to pay remuneration.

The above provisions frequently created the anomaly that non-resident taxpayers providing services in South Africa on behalf of a foreign employer with no presence in South Africa and no representative employer, as defined, were not able to have employees’ taxes withheld from their remuneration. Prior to 22 December 2023, the practice was that these employees would register as income taxpayers in South Africa and pay the income tax due on their remuneration by way of the provisional tax system and the annual income tax return.

However, the recent 2023 legislative amendments have extended the obligation to withhold employees’ tax to all representative employers. The relevant provisions now provide that foreign employers conducting business in South Africa through a permanent establishment (“PE”) are required to register as employers in South Africa and withhold the requisite employees’ taxes in respect of employees providing services in South Africa. Foreign employers currently conducting business in South Africa through a PE were afforded a period of 21 business days between 22 December 2023 and 25 January 2024 to register with SARS as an employer.

The result is that, with effect from 22 December 2023, non-resident employers conducting business in South Africa through a PE must comply with local payroll compliance obligations, which include the submission of monthly payroll tax returns and concomitant payments, bi-annual employees’ tax reconciliations and issuing of annual employees’ tax certificates by the relevant deadlines. Non-compliance or late payments will result in the employer being subject to a 10% penalty as well as interest on the outstanding employees’ tax.

It should be noted that the promulgated amendment is significantly more restricted than what was originally proposed in the 2023 Draft Tax Administration Laws Amendment Bill. It is to be welcomed that the requirement of a PE was inserted, which acts as the causal link to determine whether a non-resident employer is required to register as an employer in South Africa. It follows that non-resident employers that do not have a PE in South Africa will fall outside the ambit of the amendment, and hence, will still not be required to register, unless a representative employer as defined is present in South Africa.

However, the practicalities surrounding SDL and UIF contributions in the case of non-resident employers who are not required to withhold PAYE remains a challenge, although in this instance it should be noted that the definition of ‘employer’ for UIF and SDL purposes follows the definition of ‘employer’ for employees’ tax purposes as contained in the Fourth Schedule to the ITA. In addition, it may be noted that in terms of the Unemployment Insurance Contributions Act 4 of 2002 section 4(1)(d), if non-resident employees are sent to provide services in South Africa for a specified period of time and their secondment (or similar) agreement stipulates that at the end of their assignment they are required to return to their home country, they are exempt from paying UIF in South Africa. Therefore, depending on the circumstances it may occur that even where the foreign employer is required to register as an employer and subsequently withhold PAYE and SDL in South Africa, if the non-resident employees are only in South Africa for the duration of a specific project, they may not be required to pay UIF.

We caution that these developments may have a practical effect on non-resident employers with a PE in South Africa. This will entail some planning and adjustments with respect to systems and processes, which may include engaging an external payroll service provider, and additional time spent on compliance matters. These additional obligations are likely to add to the employers’ costs in South Africa.