Historically, a non-resident employer was only required to deduct and pay over employees’ tax in respect of a South African tax resident employee where that foreign employer had a representative employer who paid or was liable to pay remuneration to an “employee”. A “representative employer” in turn was, in the case of a company, essentially a public officer of a company. If a non-resident employer did not have a “representative employer” in South Africa that paid (or was liable to pay) remuneration, then no employees’ tax obligation would arise for the foreign employer. Tax compliance for the local South African tax resident individual would then be accounted for under the provisional tax system.

During the 2023 legislative cycle, National Treasury proposed removing the distinction between resident and non-resident employers on the basis that any employer (resident or foreign) must deduct employees’ tax. National Treasury was of the view that the proposed amendment would level the playing field between resident and non-resident employers and ensure alignment with skills development levies and unemployment insurance contributions, which many pay. While not explicitly stated, National Treasury may also have proposed this due to the potential low levels of compliance of individuals in the context of these scenarios.

During the 2023 public consultation process, there was some pushback from industry and commentators alike. In particular, it was raised that this would cause significant administrative costs for foreign companies in circumstances where the provisional tax system should theoretically already cater for this. National Treasury partially accepted this comment and revised the proposal on the basis that the employees’ tax withholding requirement would be limited to non-resident employers conducting business through a permanent establishment in South Africa. This was aimed at alleviating the administrative burden on non-resident employers in general and limiting the obligation to non-resident employers that have business activities in South Africa.

However, since the amendment, a number of practical difficulties and challenges have arisen. For example, while there are guidelines as to what constitutes a “permanent establishment”, this is largely a factual test in circumstances where it is not always easy to obtain certainty. Moreover, while permanent establishment is generally a corporate income tax concept, it is now being used in the context of employees’ tax, which leads to interconnected complexities. 

Over and above this, it has been argued that this amendment can have anomalous consequences if the employee in question is not also effectively connected to the permanent establishment. For example, a non-resident employer with a permanent establishment in South Africa could employ a South African resident employee in its home country who does not have any connection to the South African permanent establishment. In such circumstances, the non-resident employer would have a withholding obligation in relation to the South African resident employee although employment is not exercised in South Africa.

The Minister has therefore announced that it is proposed that the permanent establishment requirement for non-resident employers should be amended to include an additional requirement that the employee is effectively connected to the permanent establishment in South Africa. This would align with generally accepted international tax principles and will likely be welcomed by employers.