Tax: South African VAT implications for foreign employers of seconded employees

An overview of the South African tax implications to be considered when entering into a secondment agreement.

This briefing has been published by Conor Mcfadden of Fasken Martineau, Johannesburg, who has agreed to Simmons & Simmons making it available on elexica.

The secondment of employees to South Africa has become a common practice of multinational companies as the demand for international skills and cross-border services has increased over the past couple of years.

Ordinarily, a South African company will enter into a secondment agreement with its foreign holding company or subsidiary company (or even an unrelated party) for the provision of services to the South African company to be carried out by the employees of the foreign company in South Africa. Secondment agreements generally provide that while the employees are seconded to the South African company, such employees remain employed by the foreign company and they will continue to be remunerated by the foreign company. The foreign company continues to pay for the employment costs of such an employee while they are seconded to South Africa. The agreement in most instances provides that the foreign company is entitled to recover any costs, such as salaries and any other associated additional costs, from the South African company as a part of a service fee.

There are various South African tax implications that need to be considered by both the South African company and foreign company when entering into a secondment agreement, particularly employees’ tax, exchange control and reportable arrangement implications. However, the value added tax (VAT) implications are often overlooked.

From a VAT perspective, the service fee charged to the South African company may potentially trigger a VAT liability for the foreign company in South Africa. South Africa does not have specific place of supply rules for VAT purposes, therefore whether or not a foreign company has to register for VAT in South Africa depends on the factual circumstances and whether all the requirements of the definition of "enterprise" are met.

This is so because, in terms of the Value Added Tax Act 89 of 1991 (the Act), any person who carries on an enterprise or activity in South Africa could be required to register for VAT. An “enterprise” is defined in the Act to include any activity carried on continuously or regularly by any person in South Africa or partly in South Africa to another person, for consideration.

The secondment of employees to South Africa for purposes of providing services constitutes an activity and if the foreign company seconds multiple employees to South Africa during the course of a year that activity will be considered to be continuous and regular. In the Act the word ‘services’ is broadly defined and can therefore include the secondment of employees by a foreign company to a South African company. The fee that is paid by the South African company to the foreign company for the secondment of the employees to South Africa would be viewed as consideration for the services supplied.

Therefore, by seconding employees to South Africa the foreign company will be carrying out an enterprise or activity in South Africa for VAT purposes. The frequency of the presence of the employees’ of the foreign company in South Africa and not the length of their stay in South Africa determines whether the foreign company’s activities in South Africa constitutes an enterprise for VAT purposes.

However, even if the activities of the foreign company constitutes an enterprise, the foreign company is only required to register for VAT in South Africa and become a VAT vendor if the total consideration received by it from the South African company for these services exceeds R1m in a 12 month period (or the contract is anticipated to exceed R1m). As a registered VAT vendor in South Africa the foreign company must then charge VAT at 14% on the consideration it receives from the services it provides to the South African company in terms of the secondment agreement. In order to ensure compliance with the Act, the foreign company will be required, amongst other things, to appoint a VAT representative in South Africa. The VAT representative must be a natural person that is a resident of South Africa and who will act as an agent for the foreign company with regards to the duties and obligations imposed by the Act on the foreign company.

It is therefore crucial that South African companies and foreign multinational companies assess the VAT implications that may arise from entering into a secondment agreement in order to ensure compliance with the South African tax legislation.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.