Global Tax Alert | 4 June 2013

South African permanent establishments face further scrutiny

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As the South African Revenue Service (SARS) continues to increase its scrutiny with respect to permanent establishment (PE) exposure risk for foreign companies doing business in South Africa, new issues are raised.1

It often happens that although a foreign company is required to register for Value-Added Tax (VAT) purposes in South Africa by virtue of having an ”enterprise” in South Africa for VAT purposes, it may not be required to register for South African corporate income tax purposes as such company has no South African sourced income or PE in South Africa. The reason for this is that the definition of enterprise is somewhat wider than that of a PE.

With respect to foreign taxpayers that are registered for South African VAT purposes, the SARS is now issuing a further query essentially requesting the foreign company to substantiate why it is not required to be registered for corporate income tax purposes in South Africa and why it would not have a PE in South Africa. With respect to the issue of a PE in South Africa, the foreign company is required to submit (within a fairly tight time period) all relevant documentation and information as the relevant proof as to why the foreign company would not have a PE in South Africa. Such documentation and information would include copies of the annual financial statements, copies of all contracts and task orders, details of employees in South Africa, specific details as to business activities, etc. The foreign company is also required to give a technical explanation as to why a PE should not exist.

To the extent that South African source income and a PE may exist, the next question to ask is how much profit should be attributed to the South African PE. It may be that when an appropriate profit attribution exercise and benchmarking exercise is performed that very little profit , if any, needs to be attributed to the South African PE.


1. See EY Global Tax Alert, South African Revenue Service continues increased scrutiny of permanent establishment exposure risk, dated 6 May 2013.

For additional information with respect to this Alert, please contact the following:

EY Advisory Services Ltd, Johannesburg, South Africa
  • Justin Liebenberg
    +27 11 772 3907
  • Jacqui Peart
    +27 11 772 3045
EY (China) Advisory Services Limited, Pan African Tax Desk, Beijing
  • Rendani Neluvhalani
    +86 10 5815 2831
Ernst & Young LLP, Pan African Tax Desk, New York
  • Dele Olaogun
    +1 212 773 2546
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
  • Leon Steenkamp
    +44 20 7951 1976

EYG no. CM3493