Ease of mobility stifled by tax?

2018/19 South African National Budget Expectations

Globally, we have seen fundamental changes to business treatment of mobile workers, thanks to the increasing ability to work remotely, ease of travel, and pressure to save costs. While, traditionally, businesses were prepared to second senior employees to another country for five years or more, with benefits such as country club membership and above average accommodation thrown in, this type of package is becoming increasingly uncommon.

To stay relevant, agile and flexible amidst technological changes, companies are having to be more creative in approaching global mobility. There is a significant increase in shorter secondment periods and more flexible types of mobility, such as short term business travel, crowdsourcing talent, freelancers, etc.

These new global mobility arrangements can be complex from a tax perspective. All the different types of taxes need to be considered in multiple jurisdictions for all parties involved (individuals and companies) each time there is a cross-border movement. Taxes can include corporate income tax, personal income tax, employees’ withholding tax, social security taxes, value added tax, and more.

In these circumstances, the ease of discoverability of individual and corporate compliance requirements can be daunting. Further complexity may be added with the proposed changes to the foreign employment income exemption. To understand the tax impact of a cross-border trip takes expertise, time, money and possibly the advice of one or more experts. This may be possible for bigger global businesses but is often out of reach of smaller companies. The dichotomy for business between flexible mobility and the need to comply with tax in multiple countries may be one of the factors in non-compliance.

It would be a welcome addition for SARS to introduce a centre of excellence to provide clear and easy guidance to persons in this position and assist them in streamlining any required registration process.

Is South Africa losing in the competition for tax revenue?

Technology is enabling a workforce that can literally work from anywhere for anyone at any time, especially in the services industry.

Tax in relation to electronic services has been considered in terms of VAT, but not from an income tax perspective. Based on current sourcing principles, income tax is generally due in the location where the services are physically rendered. This is creating world-wide competition between countries to ensure that employees and companies are based in their jurisdiction in order to earn income tax. The question that South African tax authorities need to consider is: In an age which is moving toward anyone being able to work from anywhere, what is the incentive to make South Africa the location of work?

The amount of tax and the administrative simplicity of compliance will be amongst the key factors for companies in considering what jurisdiction to base their business. South African authorities will need to think very carefully about either how to incentivise individuals and companies to work from South Africa or about whether a change in South African tax principles will be required in future. Although South Africa introduced incentives in the form of the headquarter regime, this has not been successful for numerous reasons (e.g. complexity and stringent requirements). The country that gets this right could be well on their way to becoming the services hub for Africa.

While it is not expected that this Budget will specifically target this need, we foresee that this will be an important issue in future and could be the key in promoting South Africa as the “gateway” to Africa. In this age of technology, we can easily lose business and tax revenue to other countries if we are not able to incentivise business to use South Africa as their service base. This would promote South Africa as a service hub while helping to broaden the tax base. 

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