SOUTH AFRICAN EXPAT TAX 101: WHAT YOU NEED TO KNOW AS AN EMPLOYER

The Expatriate tax amendment finally came into effect on 1 March 2020. During this time, we have consulted with some of the larger corporate groups in places such as Democratic Republic of Congo and the Middle East to raise a corporate awareness therefrom.

Our consultations have revealed that a majority of companies with South African employees working abroad are unprepared for the drastic expatriate tax changes. Furthermore, SARS has issued a stern warning to non-compliant employers to remedy all non-compliance, or face penalties, interest and even criminal prosecution.

It has therefore emerged that there is an urgent need to clarify some misconceptions around the expatriate tax not only for employees, but employers too as they play a part in assisting South Africans working abroad to be fully tax compliant.

What is the expatriate tax?

Prior to the amendments, Section 10(1)(o)(ii) of the Income Tax Act, No. 58 of 1962 provided South African resident employees with an exemption from income tax where they render employment services outside of South Africa for a certain number of days within any 12-month period that falls within a year of assessment. In order to qualify for the exemption, the employee therefore needed to be outside of South Africa for more than 183 days as well as to be abroad for 60 days consecutively.

Effective from 1 March 2020, all foreign employment earnings will now be taxed on the surplus of R1.25 million (this is inclusive of any allowances or benefits that the company covers) at the applicable marginal tax rate. This amount is an increase from the previous R1 million threshold.

Ensuring tax compliance

You, as the employer, should ensure that you are fully prepared and equipped to deal with the amendment by first planning where you assign and resource your expats. This should be done in a careful manner so as to mitigate the additional tax cost as far as possible.

This should be followed by an equally difficult task, which is to adjust these expatriates’ remuneration packages to ensure they earn a market related net-pay whilst maintaining their agreed upon assignment remuneration packages as per their specific conditions.

Aside from the many administrative difficulties that employers will have to deal with, in some instances, the additional tax cost will be borne by the employer, as opposed to the employee. The reason for this misfortune is simple- the employee accepted the assignment on the premise of a set amount of take-home pay and, assuming these employees are likely some of the company’s best resources, the employer may want to compensate the employees for the additional taxes if they wish to retain the said resources.

Therefore, where the additional tax cost cannot be neutralised entirely, the employer will have to adjust the employee’s remuneration package. It is important that the employer consult each expatriate to gauge their flexibility and educate them accordingly on how this change impacts them.

If the above is not done, we foresee a major impact on employees’ morale and/or payroll non-compliance which may negatively affect productivity and result in interest charges and penalties from SARS as a result of non-compliance.

The tool to assist companies with tax compliance

With the necessary planning and adjustments, you can prevent the devastation of losing key resources as a consequence of the coming law changes. Be that as it may, due to the tedious and time-consuming nature of the above process, companies are reluctant to put this in place.

We have developed an expatriate tax calculator which provides both employers and individual expatriates the opportunity to explore their tax obligations post March 2020.

We are well versed in assisting companies to implement correct tax measures – which includes employment contract reviews. We are also at the forefront of this expatriate tax change as we have developed a unique expatriate tax calculator which is now available for use.

To avoid possible penalties, interest and criminal prosecution, we urge employers to take the necessary actions as soon as possible.