The draft tax law amendment published in August and targeting foreign employers has inadvertently led to an uproar amongst South African remote workers who fear the law change may disincentivize foreign employers from retaining the services of South African talent.
Once passed into law, foreign employers with South African-based employees will be required to register with Sars for payroll taxes, and become accountable for Pay-As-You-Earn, UIF and Skills Development Levies.
Tax experts raise the alarm
At SAIT’s 10th Annual Tax Indaba, held at the Leonardo over 11 – 13 September, an expert panel discussed the forthcoming law change and the potential challenges which might arise. The panel included senior tax advisors as well as a representative from Sars.
A key takeaway from the discussion was that the motivation behind the change in law was to even the playing field between local and foreign employers, and ensuring all employers contribute to UIF and Skills Development Levies. Previously, foreign employers were able to escape their South African obligations and place the burden on the employee to take care of their own taxes.
The immediate challenge for foreign employers, however, is that there is no mechanism to register for payroll taxes without first registering a company in South Africa. This means first making an application with the Companies and Intellectual Property Commission (CIPC) and complying with the various rules imposed by the Companies Act, 2008.
As soon as a company is registered, the foreign employer will also be burdened with the various legal and fiscal compliance obligations associated with running a South African company, including preparing annual financial statements and filing income tax returns with Sars.
For many employers, the compliance headache is simply too much to bear when considering that the upside is retaining the talent of a single individual employee. Darren Britz, partner at Tax Consulting SA, who chaired the panel, summarised the issues raised by the panel: Foreign employers want to comply with the law, but practically this is not so easy.
Companies Act always required registration
Legal experts have added to the debate by bringing attention to section 23(2)(a) of the Companies Act, 2008 which has always required a foreign company to register a branch with the CIPC where the foreign company “is a party to one or more employment contracts within the Republic". Therefore, foreign employers in fact always faced a South African compliance burden although perhaps the legal provision had not been widely publicised.
In this case, even if Sars offered a less onerous registration process in terms of the tax law, an amendment to the Companies Act would be required to enact a real change to the current requirement for a foreign employer to register a branch or company. As it stands, it is not quite clear how digital nomads and remote workers can navigate this landscape.
Tax workshops and Parliamentary Briefings on the 2023 tax bills
At the Tax Indaba, there were many senior Sars officials in attendance in the audience who listened to the panel discussion. It goes without saying that if Sars were not aware of the pitfalls of the law change before the discussion, they were certainly aware now.
In response to the issues raised, Sars welcomed the input from panel members and the public commentary around the implementation of the new law. Ndawoyakhe Busakwe, a specialist within the Sars LBC, who was on the discussion panel, noted that the law was still in draft phase and that National Treasury and Sars held workshops where tax commentators presented their comments. He further indicated that Parliament would hold public hearings on the 2023 draft tax bills and a response document will be issued alongside with the final tax bill which will contain the final legislative amendments. Tax experts have since provided their comments on the Parliamentary briefings to the Standing Committee on Finance, bringing to light the various potential challenges they foresee and proposed solutions for consideration.
Whatever the outcome, foreign employers, remote workers and tax experts will be paying close attention. It will not be an easy feat to balance the necessity of bringing foreign employers into the payroll tax net, with the practicality that the compliance burden might chase these employers away all together.
Written by Tax Consulting SA