New Tax Requirements for Foreign Employers in South Africa
There are new PAYE withholding obligations for foreign employers effective 22 December 2023.
The updated tax law in South Africa mandates that non-resident employers who have a permanent base (PE) in the country must register as employers for the purpose of employees' tax (PAYE). They are also required to deduct PAYE from the salaries paid to their workers.
This change may significantly impact employers with employees who work remotely from South Africa. This situation has become common recently. This new law requires foreign employers to be more careful in making sure their remote workers follow the rules.
Under the Previous Regulations
Before this change, only South African employers or their representatives had to deduct PAYE. This was the case even if they were foreign employers. The employee had no local employer to assist them. They had to handle their own tax responsibilities. They used the provisional tax system to do this.
The New Compliance Requirements
The recent law stipulates that from 22nd December 2023, all compensation is liable to PAYE deductions. As a result, some overseas employers might already be in violation of South African PAYE rules. These foreign companies are also obligated to make contributions to the Skills Development Levies (SDL) and the Unemployment Insurance Fund (UIF) via the South African Revenue Service (SARS), irrespective of whether the foreign company has a branch or offices in South Africa.
What is considered a Permanent Establishment (PE)?
In South Africa, a Permanent Establishment (PE) is defined by income tax laws. It refers to a fixed business location. It can also mean the ability to make contracts through employees or agents. These definitions follow the guidelines from the OECD Model Tax Convention.
Some foreign employers might not know that their business activities have created a permanent establishment (PE) in South Africa. Some foreign employers may not realize that their business activities have established a permanent establishment (PE) in South Africa. A PE has a broader definition than usual. It can apply in many situations, not just the ones mentioned.:
- Home-Based Office with Contractual Signing Power: A high-ranking employee operating from a home office in South Africa, who possesses the power to endorse contracts for the overseas corporation, could establish a Permanent Establishment (PE).
- Extended Building Construction services: A building task that persists for a minimum of six months may lead to a PE.
- Storage and Distribution Functions: An overseas firm that leases storage facilities in South Africa for the importation and short-term storage of goods already purchased by South African clients (pre-ordered prior to export) can set up a Permanent Establishment (PE). This scenario is applicable even if the firm perceives itself simply as a distributor, carrying out the majority of its business operations overseas, with just a single employee in South Africa to aid in distribution.
- Provision of Services: Providing services in South Africa for a long time can lead to a permanent establishment (PE) in the country. This is especially true if there are foreign employees or contractors involved.
- Management or Control: If important management or control tasks are done in South Africa, it could create a permanent establishment.
Establishing a Permanent Establishment (PE) is a complicated process that necessitates a comprehensive examination of the pertinent double taxation treaty and possibly any multilateral agreement that applies to the foreign firm's tax jurisdiction and South Africa. This also necessitates a profound comprehension of the company's operations and dealings in South Africa.
How do foreign employers ensure compliance?
- Analyze PE Status: Confirm whether the business operations establish a Permanent Establishment (PE) in South Africa. Registration as employers and withholding of Pay As You Earn (PAYE) is mandatory only for those with a PE.
- Register as an External Company as required by CIPC and SARS: Should it be confirmed that a PE is set up, the enterprise is required to enlist as an "overseas firm" with the Companies and Intellectual Property Commission (CIPC). This procedure is crucial for registering as an employer with SARS.
- Ensure Payroll Administration meets local legislative requirements: Once registered, the company is required to administer a South African payroll by enrolling as an employer with SARS and carrying out monthly payroll responsibilities.
Overseas employers should refrain from hastily signing up for PAYE in South Africa unless they are sure they possess a PE, like a fully functioning branch. They should initially seek a tax opinion to verify their status and then move forward with PAYE registration if required.
The Importance of Compliance
Failure to comply can lead to substantial fines. Hence, we advise overseas employers to swiftly familiarize themselves with and adhere to these stipulations to evade fines and guarantee seamless business activities in South Africa.
It's important for foreign employers in South Africa to get professional tax advice for their operations and employees.
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