Employees who render services outside of South Africa often find themselves in a predicament regarding their tax affairs. As tax residents they are subject to tax on their worldwide income and when they render services in the foreign country, the foreign country as the country of source may also have a right to tax the income. This results in double tax that places an employee in financial hardship. Employees who are often impacted by this are those who do not qualify for the foreign employment income exemption under section 10(1)(o)(ii) of the Income Tax Act, 1962. From 1 March 2020 the number of employees affected may increase as the exemption will be limited to R1.25 million. If an employee then does not qualify for the exemption or to the extent that an employee’s remuneration exceed R1.25 million, a double tax situation will arise.
What is the purpose of the directive?
The purpose of the directive is to allow an employer to apply for a different basis to calculate the amount of employees’ tax to be withheld from the employee’s remuneration on a monthly basis. The method is agreed upon between SARS and the employer to vary the basis on which the monthly employees’ tax liability is calculated by taking into account the potential foreign tax credit to reduce the rate of tax in South Africa for employees’ tax purposes. The granting of the actual foreign tax credit under section 6quat of the Act can only be done on assessment when the employee submits the income tax return and provide proof of the tax proved to be payable in the foreign country where services were rendered.
When can a directive be applied for?
The moment an employee sits in a double tax position because the exemption under section 10(1)(o)(ii) is not applicable or the employee earns more than R1.25 million and to the extent that the excess above R1.25 million becomes subject to tax in South Africa.
Who must apply for the directive?
An employer can apply on behalf of affected employees for a directive. The employer must be aware of the potential risk involve should an employee’s circumstances change that may affect the withholding obligation of the employer. It may result in concomitant penalties and interest should there be an under withholding of employees’ tax by the employer. The application is limited to the employees who are or are anticipated to be subject to double tax.
The employer must complete the IRP3(q) – Request for a Directive – Variation in the Deduction / Withholding of Employees’ Tax’ application form on eFiling. To login or register on eFiling, click here.
How to apply?
An employer can only apply for a directive on eFiling. The IRP3(q) form must be completed and on the application form the affected employees’ details must be provided. Refer to the IT-AE-13-G01 – Completion guide for IRP3q Directives – External Guide together with the following documentation:
- A detailed application letter setting out the basis and reasoning to vary the basis on which employees’ tax must be withheld in respect of the affected employees.
- A consideration of the relevant tax treaties applicable, if any and the impact thereof to the affected employees.
- The proposed method by the employer and a sample calculation of how the method will be applied on the payroll should also be provided.
When will an application for a directive not be considered?
An application by an employer will not be considered under paragraph 10 of the Fourth Schedule if one of the following conditions apply:
- The remuneration received by the employee is below the tax threshold.
- The employee’s remuneration is exemption under section 10(1)(o)(ii) (less than R1.25 million).
- The employee’s income is not subject to tax in the foreign country and therefore not subject to double tax.
- A foreign employer that has no obligation to deduct withhold employees’ tax applies for directive.
Documentation required for directive?
No additional proof of taxes proved to be payable in the foreign country is required in respect of each employee when applying for a directive under paragraph 10 of the Fourth Schedule. The reason being, the employee is required to claim the actual section 6quat credit on assessment at which point supporting documentary proof is required to substantiate the amount of tax proved to be payable in the foreign country.