The National Treasury is proposing to remove the distinction between resident and non-resident employers for the purposes of employees’ tax (PAYE), such that non-resident employers with employees in South Africa – or those who employ South African tax residents to work outside South Africa – would accrue new local payroll compliance obligations.
The Draft Tax Administration Laws Amendment Bill 2023, which was published on 31 July for consultation, would also ensure alignment with the employer’s obligations in relation to Skills Development Levies (SDL) and Unemployment Insurance Fund (UIF) contributions.
Currently all non-resident employers are obliged to pay SDL and UIF contributions but the obligation to withhold PAYE only arises in cases where the employing company has a representative employer in South Africa – any agent who resides in South Africa and has the authority to pay remuneration to the employee on behalf of the non-resident employer.
An employer must register to pay SDL to the South African Revenue Service (SARS). UIF, however, can either be paid via SARS if the employer is registered with SARS, or directly to the fund if the employer is not.
Under the proposed amendment, any non-resident employer – whether it has a representative employer or not – who pays or is liable to pay remuneration to any employee would be obliged to register as an employer with the SARS and deduct PAYE from remuneration paid to that employee.
To register with SARS, an employer will require a Companies & Intellectual Property Commission (CIPC) registration number, a SARS income tax registration number and a South African bank account.
They would also have to comply with local payroll compliance obligations, which include the submission of monthly payroll tax returns with payments and the issuing of annual employees’ tax certificates by the relevant deadlines. The employer would be subject to a 10% penalty, as well as interest, in case of non-compliance or late payments.
For the individual employee, a normal tax liability would arise in respect of annual taxable income exceeding the tax threshold. Whilst the obligation to withhold employees’ tax rests with the employer, the income tax liability remains with the employee.
The proposed amendment is aligned with the SARS Vision 2024 and is designed to raise taxes from individuals on a real-time monthly basis and change the process governing the submission of individuals’ income tax returns.
“The proposal has attracted a lot of criticism because it may discourage remote workers who earn in foreign currencies from wanting to live and work in South Africa and therefore limit South Africa’s potential as a remote working destination,” said Ralph Wichtmann, Managing Director of Sovereign Trust (SA) Ltd.
“This measure will potentially further reduce the South African tax base and collection of indirect taxes because these individuals live in South Africa and spend a portion of their income locally. It is also feared that it could limit the ability of local talent in South Africa to find employment with foreign companies and multinationals, at a time when South Africa should be encouraging skilled local workers to remain in South Africa rather than seek job opportunities abroad.”
The consultation closed on 31 August, and it is anticipated that the legislation could be brought into force in January 2024. In the meantime, non-resident employers with employees in South Africa or who employ South African tax residents to work outside South Africa should ensure that they are in a position to comply with the requirement for payroll withholding should the legislation be approved.