Expatriate employees in South Africa
A Supreme Court of Appeal decision reached last month may have an impact on the tax treatment of the professional fees you pay to a third party tax practitioner to ensure compliance with regards to your expatriate employees.
One of the changes is that employers are now likely faced with higher tax costs where they use the services of a tax practitioner to facilitate the delivery of tax compliance services to its expatriate workforce.
When an employer sends an employee on an assignment either to or from South Africa, it will typically engage the services of a suitable tax practitioner in order to ensure compliance in both the home and host country of assignment.
The question at the centre of the appeal case between the taxpayer (BMW South Africa (Pty) Limited) and the Commissioner for the South African Revenue Service (SARS) was whether the professional fees paid to external tax consultants for the purpose of assisting with their South African tax compliance obligations was a taxable fringe benefit for employees’ tax purposes.
From a governance perspective, it is arguable that the service is as much for the benefit of the employer as the employee. In its defence, BMW argued that the services were not for the expatriate employee’s private or domestic use as it represented a bona fide business expense directly associated with the placement of the employee by BMW AG in South Africa.
It was also argued that the appointment of an external tax consulting firm was to ensure correct management of the BMW Group’s expatriate tax equalisation policy. Under the terms of the policy, expatriate employees who were required to work in countries outside of their home base were not prejudiced in their net income. It was contended that the work done by the tax consultants in relation to the expatriate employees was utilised by BMW to ensure that the correct amount of tax was paid on the employees’ behalf.
A condition of the group tax equalisation policy is that the expatriate employee is required to comply with all applicable South African tax laws. The contract between BMW and the employee included a condition whereby BMW was required to hire a tax practitioner to assist its expatriate workforce in complying with its South African tax compliance obligations. BMW was obliged to bear the cost of the tax practitioner’s services. It should be noted that the formal service contract was between BMW and the external tax practitioner.
The Supreme Court of Appeal agreed with SARS argument that the tax practitioner’s fees were a taxable fringe benefit on the basis that the service was wholly for the private use of the employee. It cited that it was the employee’s sole obligation to comply with his/her statutory tax compliance obligations, including registering with SARS for tax purposes and filing an annual tax return.
For various reasons, including the reasons outlined by BMW South Africa in this case, it has always been a widely held view across the tax practitioner profession that the fees in question should not be considered a taxable fringe benefit. However, in light of the Supreme Court of Appeal decision, it would be prudent for an impacted employer to revisit its existing policy on the matter so as to ensure it is compliant from an employees’ tax perspective.
On a final note, whilst expatriate employees were the particular focus of the court case in question, it is submitted that the very same principles would be adopted by SARS where an employer paid fees to a tax practitioner to assist with the tax compliance filing obligations for any of its directors/local employees.