Foreign companies often need to send employees to South Africa for execution of local contracts or to assist South African group companies for various reasons. While South African income tax considerations, permanent establishment concerns and double tax treaty provisions are often considered in detail, the South African VAT (or ‘goods and services tax’ as it is known in many other jurisdictions) consequences are hardly ever taken into account.

South Africa, unlike many other countries in the world, does not have specific place of supply rules. Rather, South African VAT is collected through the vendor registration method or the reverse charge mechanism for imported goods or services. In this article we will focus on the vendor registration method and the possible registration obligation for foreign companies consequent upon employees operating in South Africa.

The vendor registration method:

The vendor registration method requires of any person (whether local or foreign, resident or not resident) to register for VAT in South Africa if that person carries on an enterprise for South African VAT purposes with past or expected sales exceeding ZAR 1 000 000. Such registration gives rise to regular reporting obligations to the South African Revenue Service (SARS) and failure to report where an obligation to do so exists gives rise to penalties and criminal sanctions.

An enterprise will be carried on for South African VAT purposes if a person conducts any activity in South Africa on a regular or continuous basis and in the course of furtherance of that local activity sells either goods or services. What exactly constitute a continuous or regular activity in South Africa for South African VAT purposes is not entirely clear under South African law and each case needs to be considered on its own facts. SARS have, however, expressed a formal view that short bi-monthly visits to South Africa by more than one employee of a foreign company is sufficient to trigger an obligation on a specific foreign company under consideration to register for South African VAT and report to SARS. Similarly, SARS have expressed a view that short training sessions provided in South Africa on software products of a specific foreign company under consideration by employees of that foreign company is likely to trigger a registration obligation under the vendor registration method and concomitant reporting obligations.

Foreign companies sending employees to South Africa should take care to consider South African VAT implications and are advised to seek advice in respect of same. South African VAT implications are not driven by the existence or otherwise of a permanent establishment in South Africa or any South African income tax obligation. In fact, it often occurs that a foreign company has no South African income tax obligation but indeed has a South African VAT obligation.

Question from Lawrence Thipe

I’m in the ICT sector and need to hire a Foreign Employee from Mozambique. Do you have an idea on what I should do?

Answer

When hiring a foreign national a number of items need to be taken into consideration. The first item to note is to make your offer of employment subject to the obtaining of the necessary work or residency permits.

In this regard, where the candidate is required to enter the country urgently to start working as soon as possible, it is recommended they first apply for a Visitor Visa under Section 11(2) of the Immigration Act of 2002, as amended, which allows the candidate to work for a period of up to three months, and this visa takes 5 – 10 days maximum to obtain. These temporary work permits are obtained hassle-free and is far more preferable that running the risk of being caught as illegally working, arrest for breach of immigration rules etc.

Once done, the candidate may enter the country and start working and you need to start looking at the process of applying for the longer term work visa. The Critical Skills Work Visa is favourable for candidates in the ICT sector and we recommend considering this category first and foremost. We strongly advise against the “General” Work visa category because of the involvement of the Department of Labour which is still at this stage lengthy and often unsuccessful. The candidate will be required to return to Mozambique to apply for the visa and may take 30 days to complete.

In terms of remuneration, the candidate must be paid by South Africa and as such will be subject to South African taxes and in accordance with the double tax agreement between South Africa and Mozambique.

Whilst the employee’s remuneration is subject to tax, there are a number of special planning items that can be considered for expatriate employees, these include tax free accommodation for the first two years and up to R25 000 per month, time outside South Africa is exempt and a log book of travel should be kept to calculate this, one month relocation allowance is exempt, and where he has not worked for the complete year in South Africa a portion of his taxes may be refunded and can be claimed back from SARS on personal tax assessment.

Other items to consider include –

• Split payroll setup, where a portion of his salary is paid locally and the balance is paid offshore (this is not a tax saving mechanism, but allows employees to receive their money where they need it).
• A correctly setup South African non-resident bank account.
• Ideally the candidate should not belong to the South African retirement fund but should rather take out private insurances, including life and disability cover.

There are specialised providers in the market and we can refer you to them, if needed.