South African resident employers are obliged to deduct employees' tax from their employees' remuneration, whereas non-resident employers are only obligated to do so if they have a representative employer in South Africa (i.e. a South African resident agent of the employer having authority to pay remuneration). A proposed amendment will soon change this position. The proposal seeks to remove the distinction between resident and non-resident employers, which would mean that non-resident employers may become liable to deduct South African employees' tax even if they do not have a representative employer in South Africa.
This amendment could have far-reaching implications for foreign employers. It seems that this withholding obligation is intended to apply primarily to foreign employers with South African tax-resident employees who are based in and render employment services in South Africa. In this instance, under the current law, the employee would already be required to be a provisional taxpayer and arguably, the new proposals are superfluous. It will also, in future, seek to apply to foreign employers which have non-resident employees working in South Africa.
While the intended effect appears to be that the withholding obligation should only apply in relation to non-resident employees who do not qualify for relief from South African tax in terms of an applicable double tax treaty, this is not provided for in the draft proposals. It appears that the intention is that foreign employers who employ a South African tax resident employee to work outside South Africa should not be subject to the withholding obligation, although this is unclear from the wording of the legislation.
This change will impose a significant and costly administrative burden on many non-resident employers and will be a disincentive to employ individuals in South Africa in terms of remote working arrangements. This may also impact the digital nomad visa currently being considered.
These concerns have been raised by commentators who have submitted comments on the draft proposal, and in particular, that the circumstances in which this withholding obligation will arise should be clarified. Further clarity should be available towards the end of October or early in November.
It is important to note that this change is likely to come into effect when the relevant legislation is promulgated, which could be in December 2023 or January 2024. Accordingly, all foreign employers with employees (resident or not) working in South Africa should consider the potential impact of this change as it may result in an employee's tax withholding obligation in South Africa and consequential cash flow and double taxation complications. It should also be borne in mind that the imposition of an employee's tax withholding obligation on foreign employers could potentially result in consequential tax enforcement and/or regulatory implications for those foreign employers.
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