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South Africa: Why do we not encourage remote working?

8 December 2023
– 6 Minute Read

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Overview

  • This is the third article in a series on employee mobility.
  • The global remote working trend provides South Africa with the opportunity to become a jurisdiction of choice for employees wishing to work in South Africa for their foreign employer.
  • Remote working offers a unique opportunity to bolster South Africa’s tax coffers, both through the income tax on employees’ remuneration, as well as the indirect benefits of the individuals paying rent or purchasing property in South Africa, shopping at local shops and eating in South African restaurants, thus creating indirect employment and boosting economic growth, without sacrificing any South African jobs.
  • Tax proposals to make South Africa a more attractive destination for remote workers, are outlined in this article.

The global remote working trend provides South Africa with the opportunity to become a jurisdiction of choice for employees wishing to work in South Africa for their foreign employer.

The international travel restrictions during 2020 opened a new world of possibilities for many employees who realised that improved technology permits many of them to continue working for the same employer, but from a foreign jurisdiction.  In most instances of remote working, the employer does not intend to establish a presence or to commence operations in the foreign jurisdiction.

Instead, an employee prefers to work in a foreign jurisdiction for personal reasons, such as employees in the Northern Hemisphere wishing to escape the cold European winter and work in sunny South Africa, or individuals who prefer to work in South Africa for personal or family reasons, even if they are employed by a non-resident employer. This may also permit South Africans who are unable to find employment in South Africa, to work for a foreign employer, earning foreign currency, without having to leave the country.

These examples generally do not involve South African vacancies. Instead, these are ‘foreign’ vacancies that the individual can perform remotely, from South Africa, if permitted to do so by the foreign employer.

Remote working offers a unique opportunity to bolster South Africa’s tax coffers, both through the income tax on the employees’ remuneration, as well as the indirect benefits of the individuals paying rent or purchasing property in South Africa, shopping at local shops and eating in South African restaurants, thus creating indirect employment and boosting economic growth, without sacrificing any South African jobs.

So, what can be done to make South Africa a more attractive destination for remote workers, or to at least remove some of the current obstacles? This article explores some tax proposals to do just that.

Employees’ tax, Unemployment Insurance Fund (UIF) contributions and Skills Development Levies (SDL)

An employer who wishes to establish a presence in a foreign country, generally accepts that there will be compliance obligations (including tax compliance obligations) in the foreign jurisdiction. On the other hand, a foreign employer who does not plan to expand to a foreign jurisdiction but simply permits an employee to work remotely generally prefers not to have to register with tax and other authorities in the foreign jurisdiction and to have to submit returns.

In the Draft Taxation Laws Amendment Bill released in July 2023, it was proposed that all foreign employers should register with the South African Revenue Service (SARS) and withhold employees’ tax (also referred to as PAYE). Fortunately, National Treasury has revised this, and it is now proposed that foreign employers must register with SARS if they conduct business through a permanent establishment (PE) in South Africa. In those instances where the employer is not conducting business through a PE in South Africa, the collection mechanism for the payment of income tax on the employees’ remuneration would be via the provisional tax system.

Another practical problem for foreign employers is in respect of the obligation to pay UIF contributions and SDL.  Currently, a foreign employer could be obliged to pay UIF contributions and SDL even if the employer is not obliged to withhold employees’ tax. While most foreign employers have no in principle objection to paying UIF and SDL, the obligation to pay these amounts gives rise to substantial practical difficulties: While the payment of UIF contributions directly to the UIF is possible but difficult, it is impossible to pay SDL unless the employer registers with SARS as an employer. Aligning an employer’s obligations in respect of employees’ tax, UIF and SDL would thus be very helpful.  Alternatively, provision should be made for a simple mechanism for the payment of these amounts by employees rather than by foreign employers.

Permanent establishment

Another issue which often comes up in the context of remote working, is the potential risk that the employees could generate income from a South African source for the foreign employer.  If the foreign employer derives income from a South African source, and if the foreign employer is tax resident in a jurisdiction that has concluded a double tax agreement (DTA) with South Africa, then the next question is whether the employee creates a PE for the foreign employer. If yes, SARS will be entitled to tax the foreign employer on its business profits, to the extent that the business profits are attributable to such PE, if not, SARS will not be entitled to tax the business profits of the foreign enterprise.

A PE is defined in most DTAs to mean ‘a fixed place of business through which the business of an enterprise is wholly or partly carried on’A foreign employer with a PE in South Africa would not only be obliged to register as a taxpayer and pay income tax, but also to register as an employer for employees’ tax withholding purposes. SARS has not yet issued any guidance on whether an employee’s home office could constitute a ‘fixed place of business’ for purpose of the interpretation of the PE definition. Accordingly, there is some uncertainty for foreign employers whether their remote working employees could constitute a PE for the foreign business. Providing guidance in this regard, would be extremely helpful for foreign businesses employing or seeking to employ remote workers in South Africa.

Digital nomad visas

While this is not a tax issue, the delay in the implementation of digital nomad visas forms part of the inability to establish South Africa as an excellent remote working jurisdiction. Not only has Government not yet implemented the digital nomad visa scheme, but it has become notoriously difficult for foreigners to be granted work and other types of visas.

This must be compared to countries such as Canada, Mauritius, Namibia and Spain that offer special visas for so-called digital workers who work and live in those jurisdictions, while working for an employer based in another jurisdiction. These visas are typically granted subject to a minimum level of income earned which differs from one jurisdiction to the next.

Conclusion

It makes a great deal of commercial sense for South Africa, a country struggling with slow economic growth and high unemployment rates, to implement a remote working scheme for employees of foreign companies. Such a scheme should include remote working visas and, from a tax perspective, should permit the payment of employee-related taxes and levies (PAYE, UIF contributions and SDL) without requiring the employer to register as an employer with SARS. The scheme could also provide the foreign employer with clear guidelines to ensure that it does not inadvertently establish a PE in South Africa.