Due to the nature of their business, many multinationals send their employees to work in other countries, in order to:

  • manage and assist with special projects;
  • implement firm-wide systems; and
  • ensure a consistent level of quality in operations.

Such seconded employees are often subject to taxation in their host country, yet remain tax residents in their home country.

In order to avoid the potential double taxation of remuneration, many companies implement a tax equalisation package regarding such employees, whereby the tax on seconded employees' remuneration remains the same regardless of where they work. In other words, the relevant parties agree that the host country company will cover all taxes incurred on remuneration derived in the host country, so that the seconded employee is in the same tax position that he or she would have been in if working solely at home. This mechanism is useful for encouraging employees to agree to secondments, which are essential to the sustainability of multinationals.

In its April 29 2016 decision in ABC (Pty) Ltd v C:SARS (Case IT13775), as yet unreported, the Johannesburg Tax Court considered issues that arose as a result of the tax arrangements entered into between the host country employer (the taxpayer) and its expatriate employees, who were seconded from their home countries to work in South Africa under a similar arrangement to that described above.


The taxpayer was part of the ABC Group, a worldwide organisation which required its various operations to operate on a similar basis and apply similar standards. As part of its global business imperative, ABC's employees were required to work for short or medium periods in foreign countries. Invariably, the seconded employees remained residents in their home countries and continued to submit tax returns there.

ABC's standard employment relationship operated on a tax equalisation basis (as described above), which essentially involved the expatriate employees paying the same effective tax rate in their host country as that which they would have paid had they remained in their home country.

In order to protect the interests of the taxpayer and ABC, payments were made to identified tax consultancy firms for services rendered in respect of the taxpayer's expatriate employees. The employees had no choice regarding the provision of the tax consultancy services, as it was one of their employment conditions.


The parties agreed that the court needed to consider:

  • whether the taxpayer's payments to the tax consultants fell within the ambit of Paragraph (i) of the definition of 'gross income' in Section 1 of the Income Tax Act (58/1962) and, if so;
  • whether the payments constituted taxable fringe benefits within the ambit of Paragraphs 2(e) or 2(h) of Schedule 7 of the act.

Did payments fall within definition of 'gross income'?

The first question which needed to be considered was whether the expatriate employees received or accrued any benefit or advantage from the taxpayer's payment of the tax consultancy fees within the meaning ascribed in Paragraph (i) of the definition of 'gross income'.

The taxpayer's main contention was that the expatriate employees were not in a better financial position as a result of the tax consultancy services than that in which they would have been had they not received the services. Further, the expatriate employees' position was not improved as a result of the taxpayer's payments to the tax consultants and the use of their expertise, as their salary and tax obligations remained the same as a result of the tax equalisation arrangement.

SARS's main counter-argument was that the tax consultancy fee that the taxpayer paid for the expatriate employees was a benefit which they would have otherwise had to pay for had the agreement between the taxpayer and the employees not provided differently. Namely, while there was no outward increased benefit to the taxpayer's financial position, there was also no reduction as a result of having to pay such expenses in the ordinary course.

Judge Keightley held that SARS's argument was consistent with the historic case law, and that the tax consultancy services which were provided free of charge to the expatriate employees were benefits with a monetary value and therefore fell within the definition of 'gross income'. Therefore, the taxpayer's argument that there was no outward benefit to the expatriate employees' financial position was irrelevant.


A taxable benefit often involves a 'salary sacrifice', which is a substitution of a cash component of an employee's overall remuneration package for a non-cash benefit, which may result in a lower amount subject to the deduction of employees' tax. Paragraph (i) of the 'gross income' definition refers to the 'cash equivalent value', rather than an 'amount'. As the value of such benefits are often difficult to establish, Schedule 7 of the act provides for specific calculation methods in this regard. It therefore follows that, in addition to the court's reasons for its decision regarding this issue, the taxpayer's argument is irrelevant, as it matters not whether employees are placed in a better financial position, but rather whether a benefit has been granted which has a cash equivalent value calculated in accordance with Schedule 7 of the act. Where payments are made by employers on behalf of employees for services provided to the employees for private purposes, such payments will result in a measurable cash equivalent value.

Were benefits taxable under Paragraph 2(e) or 2(h)?

The crux of the second issue was whether the employees had used the tax consultancy services for private or domestic purposes. The parties agreed that, to the extent that the tax consultancy services were not wholly utilised for the employees' private use, but also partly for the use of the employer's business, such payments would fall outside Paragraph 2(e) of Schedule 7 of the act.

Therefore, the taxpayer's main argument in this regard was that the contractual relationship between it and the employees was such that the taxpayer was bound to pay the employees' tax, and that the tax consultant's services were, at the very least, partially for the taxpayer's business purposes. Any refunds due by SARS were paid to the taxpayer (and not the expatriate employees).

Conversely, SARS stated that, when considering the actual services rendered, they were plainly for the employees' domestic or private use. This was demonstrated in the description of the services in question – namely:

  • the registration and de-registration as a taxpayer with SARS;
  • the preparation and submission of annual income tax returns and
  • the review of annual income tax assessments.

In essence, these services related solely to the individual tax obligations of each employee and were quintessential to the relationship between SARS and the individual employee taxpayer.

The court agreed with SARS's contentions and held that, if the actual nature of the services rendered were considered, it was clear that they were for the employees' private use, which was to comply with their individual tax obligations. However, Keightley pointed out that while the intention of obtaining services was also to assist the taxpayer to fulfil its contractual obligations to those employees, such consideration of the parties' intentions was not the determining factor.

Thereafter, Keightley referred to C:SARS v Brummeria Renaissance ((Pty) Ltd 69 SATC 205), in which the Supreme Court of Appeal held that, even if a right is received or accrued in a form other than money (in that case, the right to use interest-free loans), which cannot be alienated or turned into money, this does not mean that the right has no monetary value. Brummeria stated that the test to be applied in order to determine whether a right has a monetary value is therefore objective. The judge in ABC then applied the Brummeria principle in considering, from an objective point of view, whether the tax consultancy services were for private use.


It has been argued that the application of the objective test in Brummeria as to whether something is utilised for private or domestic purposes is misconstrued. This argument is based on the fact that, in Brummeria, the court applied such a test within a slightly different context. Despite this argument, the objective test is the correct one, as the court should examine the purpose of the cheap or free services and not the intention of the parties in providing such services. This is consistent with the literature on the issue and the parties in ABC agreed to this approach.

What is unclear from the judgment is the exact nature of the business of the taxpayer and ABC. If the taxpayer could have proven that its business was of such a nature that it had to second employees offshore, and that – in order to attract such employees – it had to offer tax equalisation packages, the case may have had a different outcome. In other words, there may be a persuasive argument in favour of the taxpayer that, in the event of the tax equalisation packages not being offered to employees, such employees would not agree to secondments, which would be irreparably detrimental to the ongoing sustainability of the taxpayer's business and, therefore, such services were not wholly expended for the employees' private purposes. Unfortunately, the judgment is silent on any such evidence or arguments put forward in this regard.


The judgment re-emphasises that employers must be careful when making any payments for or on behalf of employees, regardless of the extent of agreements between the parties and the parties' intentions. Even to the extent that such services are provided voluntarily by an employer without regard to the employee's requirements, such as security services at a key employee's home, it is often difficult to ensure that such benefits fall outside fringe benefits tax, as contemplated in Schedule 7 of the Income Tax Act.