They quickly realised that this could be done while employees work from the comfort of their homes.
It also offered previously unexplored advantages for staff with families, like the degree of flexibility it offered them during lockdown. However, with more and more employers opting for remote or hybrid working arrangements, both employers and employees are unaware of the potential tax pitfalls.
From a South African tax perspective, the source of the income from services, such as employment income, refers to the location where the services are physically performed. While remote working enables individuals to be more mobile than ever before, their freedom of movement can quickly complicate their personal income tax matters.
The best way to illustrate the consequences, is to view it in degrees of complexity.
Scenario 1: Remote working in your own country
The most uncomplicated example is that of a South African tax resident working remotely inside the borders of South Africa for a South African-based company. For this scenario, let’s assume your company has embraced the digital reform and taken their business online. You are thrilled, because you are no longer office bound and you see this as an opportunity to grow within the company.
The first point to consider is where the income was sourced. Because you are physically present in South Africa when earning your income, it means that you must pay tax on your income earned to the South African Revenue Services (“SARS”). Rightfully so, considering you are using South African services, transport and infrastructure to perform your work.
Further to this, you are also still a tax resident of South Africa, meaning you are obligated to pay tax to the revenue authority in your home country.
Scenario 2: Remote working while in another country
Following a lengthy lockdown, you decide to test the newfound freedom of remote working by travelling. You have proven your worth as a remote worker and your employer agrees that you are not required to be present to perform your duties. They turn your position into a contract employee and stop deducting employee’s tax from your remuneration. You and the family relocate to Mauritius, which is close enough to South Africa should there be a need to attend important meetings in person.
As a South African working remotely in Mauritius for a South African-based company, you are viewed as a non-resident for tax purposes. Your income is sourced (services are rendered) in a country where you are not a tax resident, which means your income is rightfully subject to tax in Mauritius because you were there when you earned that income.
However, though you were not living in South Africa at the time of earning the income, you are still a South African tax resident and therefore liable to pay tax to SARS. Telling SARS that you paid income tax due to them to another revenue authority, will not win you any favour. At the same time, paying tax in two countries would make the whole exercise fruitless for you as the taxpayer, as well as both countries.
To protect your income against double taxation, where you are a tax resident of one country and getting income from a source in another country, there are various relief measures and tax credit measures in place, which come in the form of a Double Taxation Agreement (“DTA”), as well as the domestic laws of the individual countries.
In other words, as a South African working in Mauritius, you can earn an income in Mauritius from your South African employer, pay tax to the Mauritian revenue authority, and formally apply every year to SARS for relief in the form of tax credits under the DTA between Mauritius and South Africa to avoid paying double tax.
Scenario 3: Remote working for a foreign company while abroad
After a year in Mauritius, you are offered a lucrative position with a tech firm situated in Germany. You jump at the opportunity without considering the ripple effect it would have on your finances. You are now a South African citizen working in Mauritius for a European-based company.
Nothing has changed for SARS from a tax perspective. They still see you as a South African tax resident. As a taxpayer you are legally bound to submit annual tax returns, though you are allowed the grace of claiming relief under the DTA between Mauritius and South Africa.
The problem, however, comes in with the employer in Germany. If they shift the responsibility of tax to you as a contracted service provider by giving you your gross salary, you must consider how this will impact your position in Mauritius. You are earning the income in Mauritius, which means you are subject to tax in Mauritius.
SARS will need some convincing, though. The engagement with SARS can be quite technical at this stage of the game. You are no longer earning an income from a South African employer. You are getting a foreign income and paying tax to a foreign revenue service. The situation becomes unique to your individual circumstances.
In keeping with the degrees of complexity, where the German employer withholds employee’s tax and pays that over to the revenue authority in Germany, you stand the risk of being triple-taxed. If the Double Taxation Agreement has been violated in any way, you could find yourself paying personal income tax in Germany (deducted by the employer), tax in Mauritius (where the income was sourced), as well as tax in South Africa (where you are a South African tax resident without the opportunity to claim relief under a DTA).
Protect your income before celebrating the joys of remote working
If you are crossing borders while working remotely, you need to understand that, in most cases, you will be liable for tax in the country where you are situated when you earned an income. Because international employers do not always understand the tax implication to you as an individual, or the nature of tax in your home country, or even that of the country where you are earning your income, it is advisable to get the appropriate guidance from a tax professional before venturing into the remote working maze.
Do you have any questions on tax implications of remote working?
Our team of technical tax experts, with more than 17 years of experience, are just the guys to chat to. Give us a call and we can help you map up a flexible, unique and end-to-end solution to protecting your hard-earned income.
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