SARS tightens the grip on remote workers and foreign employers

The National Treasury in South Africa has revealed proposals in its February 2023 Budget to align the obligations of foreign and South African employers, which has implications for companies hiring local employees to work remotely.

The current legislation on the obligations of foreign employers is inconsistent, which the government intends to address by aligning registration requirements for foreign employers. As the trend of remote working increases, the proposals intend to make rules consistent for both resident and foreign employers.

This move may require foreign employers to register with the South African Revenue Service (SARS) as “employers”. The change would also mean that they would be accountable for all Pay As You Earn (PAYE), Skills Development Levy (SDL), and Unemployment Insurance Fund (UIF) due on remuneration paid to or payable to employees and their related payroll compliance obligations.

The proposals are a result of the global trend of remote working, which has surged since the COVID-19 lockdown and has allowed employers to employ highly skilled workers more cost-effectively than in their own countries.

The 2023 Budget Review proposes to align the employer registration requirements for foreign employers to ensure that these rules are consistent for both resident and foreign employers.

At present, a foreign employer that does not have a ‘representative employer’ in South Africa does not have to deduct PAYE from the amounts paid to South African employees as they will pay the income tax due as provisional taxpayers.

However, the employer still needs to pay the 1% Skills Development Levy (SDL) and the Unemployment Insurance Fund (UIF) contributions.

Although these proposals are still under discussion and it is yet to be seen how they will be implemented in the draft Taxation Laws Amendment Bill for 2023, it is likely that foreign employers will be required to register as “employers” with SARS.

If this happens, foreign employers will need a CIPC registration number, a SARS income tax registration number, and a South African bank account to register with SARS. However, foreign employers may not have a CIPC registration number if they are not a registered company but a foreign trust, partnership, or foundation. They may also not have a South African bank account, which could be a problem for SARS.

One possible solution for foreign employers to circumvent the payroll compliance obligations in South Africa is to engage a payroll company to be their employer of record (EOR) in South Africa. The EOR arrangement is useful for multinational companies to contract and deploy individuals wherever necessary in a matter of days without needing to go through the process of registering a subsidiary or branch in the country.

Payroll professionals usually have an international network of existing EOR companies in various jurisdictions, including South Africa. Ideally, the network of existing EOR companies (including the EOR entity in South Africa) would be wholly owned by the EOR parent entity. The South African employee will be co-employed by the foreign employer and the South African EOR company. The EOR company is the legal in-country employer responsible for complying with all South African employment legislation. The employee will be on the EOR company’s payroll, and this company will account for all payroll taxes due to SARS. The foreign employer, however, remains responsible for the day-to-day supervision and control of the employee. Any employment and work-related decisions will still be made by the foreign employer.

In conclusion, the proposals from National Treasury to align the obligations of South African and foreign employers have significant implications for businesses that hire locals to work remotely.

It appears that foreign employers may be required to register as employers with SARS, which would make them responsible for all payroll compliance obligations. While this proposed change may present practical issues, such as the lack of a CIPC registration number, a SARS income tax registration number, or a South African bank account for foreign employers, there are potential solutions available, such as engaging a payroll company to be its employer of record in South Africa.

Multinationals that contract and deploy individuals globally will need to stay informed about how these proposals develop and the potential impact they may have on their operations. Ultimately, this alignment may be a step towards greater consistency and fairness in the treatment of all employers in South Africa.

We’ll keep you updated as this legislation unfolds, and when in doubt, contact one of our experts: