Withholding PAYE on salaries of non-tax residents

BY BOBBY WESSELS Associate, AJM Tax

The emergence of a global workforce that can perform services to any employer from any part of the world, has challenged many of the legal norms under which society has operated. It is becoming increasingly important for advisers to consider these challenges and concerns in providing advice. One such consideration relates to the liability of a South African employer to withhold pay-asyou-earn (PAYE) on salaries paid to non-tax resident employees who perform those services abroad. A knee-jerk reaction would infer that PAYE would not need to be withheld. However, that reaction must be grounded in law.

The liability for withholding PAYE on remuneration paid by an employer to an employee is imposed by paragraph 2 of the Fourth Schedule to the Income Tax Act No. 58 of 1962 (the Act). Notably, there is no mention made of the tax residency status of the employee. All that is required is the existence of an employee-employer relationship and that the employer is liable to pay that employee an amount that constitutes ‘remuneration’.

If it is assumed that an employee-employer relationship exists, what remains to be ascertained is whether the amounts payable by the employer to the employee amounts to ‘remuneration’.

The term ‘remuneration’ is defined as ‘any amount of income’, and further, the term ‘income’ is defined to mean the amount of ‘gross income’ after deducting any exemptions therefrom.

For non-tax residents, amounts will only be included as part of gross income if they are derived from a source within South Africa. The source of the employment in the current scenario is not derived from within South Africa, as the employment is physically exercised elsewhere. For that reason, the salary paid in the current scenario does not fall within the definition of gross income. By extension, this would exclude those salaries from the ambit of income and, as a result, the salaries paid would not

The impact of exchange control must also be considered in advising on the flow of funds from the employer to the employee

constitute remuneration as defined in the Fourth Schedule of the Act. There has been some debate as to whether the meaning attributable to income, as used in the context of ‘remuneration’, should be the ordinary meaning of the word or the specific meaning as defined in the Act. However, given the context and purpose of the provision of the Act, it would be more appropriate to rely on the definition that the Act provides, as opposed to favouring the general understanding of the word.

Therefore, the inability of the salaries payable in the current context to fit comfortably within the definition of remuneration would absolve the employer from the corresponding obligation to withhold PAYE. As a result, where a non-tax resident derives salary income, or income of a similar nature, in respect of their employment services rendered abroad, the South African employer would not need to withhold PAYE from the employee’s salary.

The above is of paramount importance for financial advisers in advising their clients – both corporate and individual. The monetary tax implications notwithstanding, there may be some practical difficulties that accompany the compliance related to the above-mentioned scenario. Furthermore, the impact of exchange control must also be considered in advising on the flow of funds from the employer to the employee. As with any professional advice, there is a myriad of factors that must be considered; however, the liability of the employer to withhold PAYE, in the current context, may be mitigated.