Human Capital

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By Vedika Andhee

Executive summary

During recent discussions with officials from the South African Revenue Service (“SARS”), we were informed that with effect from the 2013 tax year, SARS will no longer allow the exemption or non-inclusion of foreign employment income and foreign tax credits in cases where such amounts are reflected under the incorrect codes on the IRP5 tax certificates.

In order to save on time and costs we recommend that employers ensure that they treat the amounts correctly for employees’ tax purposes and apply the correct codes on the IRP5 tax certificates.  This will avoid any future disputes, additional taxes and penalties as a result of the incorrect assessment of these employees.

Background

Residents

South African residents working outside of South Africa may qualify for an exemption from tax in South Africa on their foreign sourced income, if they are outside of South Africa for more than 183 full days in aggregate during any period of twelve months, of which at least 60 full days should be continuous.  

Employers are required to withhold employees’ tax from the employees’ remuneration, until such time as the employees meet both requirements in order to qualify for the exemption.

When an employee qualifies for the exemption on the foreign sourced income, SARS requires the income received during the period while services were rendered outside of South Africa to be reflected on the IRP5 tax certificate under code 3652 (non-taxable income for foreign services rendered).

If an employee does not meet the exemption requirements and is subject to tax in South Africa on the foreign sourced income, the income must be reflected on the IRP5 tax certificate under code 3651 (taxable income for foreign services). Under these circumstances the employee may claim a foreign tax credit in respect of any foreign taxes paid on the same income. 

Currently many employers use the normal income code (3601) to report foreign employment income.

Non-residents
 
Non-resident employees assigned to South Africa often have dual roles which require them to render services inside and outside of South Africa.  In terms of domestic law, remuneration received by a non-resident will only be taxed in South Africa to the extent that it is received from a source within South Africa.  It is established that the source of income in respect of services rendered is the place where the services are rendered.  This view is also supported in the tax treaties South Africa has entered into with various countries.

Non-residents should therefore not be taxed on services rendered outside of South Africa. However, it often happens that the remuneration is processed through the South African payroll and reported on the employee’s IRP5 tax certificate under the local tax codes.  The amount that should not have been included in the income of the employee is then excluded from the taxable income after the submission of a notice of objection to the employee’s tax assessment, in which an explanation of the situation is provided to SARS and it is requested that the amount be excluded. This is in itself a cumbersome process to follow.  

The issue

During discussions with SARS officials, we were informed that the following practice will be followed by SARS:

  • An exemption in respect of foreign remuneration will only be allowed where a “foreign service” code has been used on the IRP5 tax certificate e.g. 3652.
  • A foreign tax credit will only be allowed where the foreign employment income has been disclosed under a “foreign service” code e.g. 3651.
  • Employers should ensure that the apportionment of the income is done before the amounts are reported on the IRP5 tax certificate.

The result of the above is that where domestic codes are used (i.e. not “foreign service” codes) or the un-apportioned amounts are reflected on the IRP 5 tax certificates, it is unlikely that the assessment will be correct and this will in turn, result in time consuming disputes.

Recommendation   

Employers should ensure that the correct coding and apportionment is applied, in order to save time and effort in resolving tax disputes.

We recommend that employers review their employees’ tax disclosure codes prior to finalisation of the current year’s reconciliation process, to ensure that the IRP5 tax certificates meet the requirements of SARS and to implement corrective measures if it is not the case. Our employment tax specialists will be able to assist in this regard.