Disclosure to the South African Revenue Service (SARS) of potential tax defaults can be addressed in various ways. However, the Voluntary Disclosure Programme (VDP), as provided in the Tax Administration Act (28/2011), is the preferred and recommended option.
The VDP is a formal statutory process regulated by Part B of Chapter 16 of the Tax Administration Act, in terms of which a taxpayer can approach SARS voluntarily in order to regularise its tax affairs, with the prospect of obtaining various forms of relief. Following a successful application, the VDP process provides relief from understatement penalties (which can be up to 200% in severe cases) and 100% relief from administrative non-compliance penalties. In addition, following a successful VDP application, SARS will not pursue criminal prosecution.
Recently, the number of employers defaulting on their pay-as-you-earn (PAYE) obligations to SARS has increased. This is especially true in the case of non-resident employees where the employer is obliged to withhold PAYE deductions.
In general, a 'resident', as defined in Section 1 of the Income Tax Act (58/1962), is taxed on its worldwide income, irrespective of where the income is earned. Non-residents are taxed only on income from a South African source, subject to the application of a relevant double tax agreement. Accordingly, where a double tax agreement applies, South Africa's taxing rights may be limited – notwithstanding the fact that the expatriate employee's income is from a local source.
However, where South Africa's taxing rights are not limited by a double tax agreement, the next step is to determine whether the employer has an obligation to withhold PAYE deductions. Paragraph 2(1) of the Fourth Schedule provides that an employer which is a resident or representative employer of a non-resident and which pays or is liable to pay any amount of remuneration to any employee must deduct the employee's tax in respect of the normal tax liability of that employee.
The SARS External Reference Guide: Treatment of PAYE for VDP Purposes (Revision 1) specifically provides that where an employer wishes to regularise its employees' tax affairs through the VDP process, the employer must apply in the prescribed manner and in accordance with either one of the following options:
- The employer recovers the employees' tax directly from the employees concerned; or
- The employer applies the 'gross-up' method.
Before an employer can rely on the first option, it must have issued a valid IRP5 certificate to the relevant employee. By implication, this means that the employee must have a valid South African income tax reference number.
Where the employee does not have a valid income tax reference number and an IRP5 certificate has not been issued to the employee, the employer automatically defaults to the second option. In other words, the employer cannot recover the employee's tax from the employee concerned, but must pay the PAYE tax on behalf of the employee.
The consequence of the employer paying PAYE tax on behalf of the employee is that such payment will constitute a 'payment of the employee's debt' which triggers a taxable fringe benefit in the hands of the employee under Paragraph 2(h) of the Seventh Schedule to the Income Tax Act.
Page 4 of the SARS guide states that: "[the] benefit due to the payment of the employees' debt will result in another benefit on which tax again becomes payable." This 'tax-on-tax benefit' is calculated in accordance with the following prescribed formula:
(taxable amount x 100) ÷ (100 – employee's marginal tax rate) = taxable amount plus tax-on-tax benefit
The 'taxable amount' represents the value of the remuneration by which the employer wishes to regularise the PAYE tax. The full 'taxable amount plus tax-on-tax benefit' represents remuneration. The difference between the full 'taxable amount plus tax-on-tax benefit' and the 'taxable amount' represents the tax attributable to the tax-on-tax benefit (ie, payment of the employee's debt).
Where the gross-up of the taxable remuneration results in an increase in the tax rate from one tax bracket to the next, the marginal tax rate in the above formula must be increased by 1%. For example, where the marginal tax rate of the independent contractors equals 40%, the increase by 1% will result in a marginal rate of 41%.
The SARS guide concludes by stating that once the employer has determined the total PAYE amount payable to SARS, the employer must issue one global IRP5 certificate for the total employee's tax not recovered from the employee (including the value of the tax attributable to the tax-on-tax calculation above). Accordingly, once the aforementioned is completed, the relevant EMP501 must be amended, reconciled and submitted together with the new VDP tax certificate to SARS.
For further information on this topic please contact Gigi Nyanin or Nicole Paulsen at Cliffe Dekker Hofmeyr by telephone (+27 11 562 1000) or email (firstname.lastname@example.org or email@example.com). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.
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