Secondment arrangements are frequently and increasingly utilised by organisations operating in a global market, and with South Africa’s current skills shortage, they are an attractive option for local businesses. They can be equally attractive for employees who want to explore a new country and develop their experience.
Secondments are particularly prevalent in group company structures, where secondees are sent between ‘home’ and ‘host’ offices/legal entities in different jurisdictions. These cross-border secondments are not without risk and, when considering the details of the arrangements such as which entity will pay the secondee’s salary and how expenses will be apportioned, there are several employment and tax considerations to bear in mind.
The recent decision in the matter of Citibank, N.A. South African Branch and Another v Commissioner for the South African Revenue Service decided by the Gauteng High Court on 20 September 2023, highlights one of the potential tax issues that may arise from a secondment arrangement: a value added tax (VAT) liability for the host entity.
The case involved the secondment of employees by one or more foreign employers in the global Citigroup group of companies (referred to in the judgment as ‘Sending Home Entities’) to Citigroup Global Markets (Pty) Ltd and to the South African branch of Citibank US (Applicants, referred to in the judgment as the ‘Receiving Home Entities’). While the judgment used the concepts ‘Sending Home Entity’ and ‘Receiving Home Entity’, in this article, we use the more commonly used terms, ‘Home Entity’ and ‘Host Entity’ respectively.
The judgment also refers to a ‘further’ Citigroup company that is involved in the secondment, by administering the expatriate salary and benefits of the secondees (Agent).
The crux of the dispute is whether the secondment of the employees to the Applicants resulted in:
- The supply of imported services which would oblige the Applicants to self-charge VAT at a rate of 15% on the amount paid to the Home Entities; or
- the employment of the secondees by the Applicants, which would not trigger a VAT liability.
Unfortunately, the judgment’s description of the background facts is not too clear, but it appears that the secondments were effected in terms of:
- an assignment agreement with the secondee, which expressly stated that the secondee would not be an employee of the Host Entity, nor of the Agent; and
- an ‘Intra-Citi Agreement’ between the Home Entity (the ‘Service Provider’) and the Host Entity (the ‘Service Recipient’) for ‘the supply of employee services’. The Host Entity was obliged to pay the Home Entity for the supply of the secondees’ services. While there is reference to such amount being equal to the cost of the employees’ remuneration plus a mark-up, it appears that no mark-up was in fact charged or paid.
The Applicants sought an order declaring that the payments made by them fell outside the scope of VAT. In terms of the Value Added Tax Act, VAT is not payable in respect of imported services if the supply is in respect of services rendered by ‘an employee to his employer in the course of his employment’ to the extent that any remuneration as defined in the Fourth Schedule to the Income Tax Act is paid or is payable to such employee. To succeed with this argument, the Applicants had to be the employers of the secondees.
The Applicants argued that the secondees became their employees for the duration of the secondment, as the secondees (i) placed their productive capacity at the disposal of the Applicants and furthered the enterprise of the applicants in the course of their employment; and (ii) the Applicants had the right of supervision and control over the secondees for the duration of their secondment. Accordingly, they argued, the payment to the Home Entities did not constitute consideration for the supply of services but comprised the reimbursement of salary costs paid to the secondees.
While the Applicants argued that the Court should consider ‘the substance, not labels’ to determine whether there is an employment relationship, the Court held that the Applicants failed to discharge their onus that the secondees constituted their employees for tax purposes. The Applicants placed substantial emphasis on the fact that the secondees were treated as its employees for purpose of employees’ tax withholding. Although the judgment refers to the Applicants deducting and withholding employees’ tax from the secondees’ remuneration, it is not clear whether the Applicants included this in their monthly employees’ tax returns to SARS. If so, one would have expected the Applicants to place substantial emphasis on the fact that the secondees were treated as their employees for purpose of employees’ tax compliance.
Instead, the Applicants argued that that the secondees placed their productive capacity at the disposal of the Applicants, who had the right to supervise and control the secondees. However, the Applicants did not adduce any evidence regarding the substance of the relationship, including whether or not they actually exercised supervision and control over the secondees. The reason for this may have been the fact that the application was for a declarator and did not form part of the normal tax dispute resolution process. However, the Court held that the Applicants failed to prove that it was an ‘employer’ of the secondees and further failed to prove that the payments to the Home Entities constituted ‘remuneration’. Accordingly, the Court refused to issue the declarator.
While the judgment dealt only with VAT, a secondment arrangement could also give rise to a permanent establishment risk and thus a South African income tax liability for the Home Entity, if it is not clear that the secondees are carrying on the business of the Host Entity for the duration of the secondment.
Despite our reservations about certain aspects of the judgment, we recommend that existing secondment arrangements with South African Host Entities are reviewed to assess whether such arrangements may be vulnerable to attack by SARS.
Depending on the factual circumstances of the actual relationship between the parties, where employees are seconded/assigned from a Home Entity (whether local or cross-border) to a Host Entity in South Africa, the Host Entity in South Africa may be considered a co-employer under South African law.
If the secondees can establish that, in addition to being employed by the Home Entity, they were also employed by the Host South African Entity, then regardless of the terms and conditions of the secondment agreement, both the Host Entity and Home Entity may be found to be employers of the employee in South Africa. In relation to cross-border secondments, this means that the secondees will be entitled to the protections provided by our Labour Relations Act (LRA), including those in relation to unfair dismissals and unfair labour practices. This is because our courts generally adopt a substance over form approach, which means they will look beyond the terms of an agreement to determine who the true employer(s) of the employee is (are).
Our courts have held that, in determining who the employee’s employer(s) is (are), it will take into account various factors, including, amongst others, any paper trail (for example any employment contract) which links the employee back to a particular entity, who the employee is paid by, any representations that the parties make to a third party (such as the public) which give rise to the impression that a co-employment relationship exists, and any other conduct towards the employee that is inconsistent with the stated employer (i.e. the Home Entity).
Finally, and perhaps most importantly, is the control element. This refers not only to which entity exerts control over the day-to-day activities of the employee, but which entity ultimately determines the employee’s fate within the organisation insofar as it has the ultimate say over the decision to hire and more vitally, dismiss, the employee.
Further, in respect of cross-border secondment arrangements, even though foreign employees working for a South African Host Entity would be subject to the terms of their foreign employment contracts, there may be risks for the Host Entity if the Basic Conditions of Employment Act (for example, in relation to minimum annual leave, sick leave, notice period, etc.), are not complied with while the employees are working in South Africa.
From a different angle, South African companies looking to second/assign employees to foreign companies should be aware of the laws applicable in the relevant jurisdiction. Specialist legal advice on tax and employment law should therefore be sought in those foreign jurisdictions, including a careful consideration as to the possibility of creating a co-employment relationship.
Parties should not only obtain advice on immigration laws, employment laws and tax law consequences but it would also be advisable for the Home Entity to consult with its fund managers/administrators about the impact an employee’s absence from the home country may have on the employee’s participation in any medical aid scheme, retirement fund, share incentive scheme or voluntary or compulsory group risk insurance policies in their home country.
While cross-border secondments to South Africa can be attractive both for employees wanting to see the world, and for companies looking to access necessary skills, we recommend reviewing these arrangements carefully to determine, among others, whether they may be vulnerable to attack by SARS, create co-employment risks, or result in practical difficulties for the secondee from a benefits perspective.
Written by Aneria Bouwer, Senior Consultant; Sian Gaffney, Senior Associate; and Layla Shah, Candidate attorney from Bowmans Employment and Benefits practice in South Africa.