South African employers should guard against tax non-compliance from expatriate employees

Host employers must maintain a “shadow payroll” to ensure full tax compliance.

As Covid-19 variants are becoming relatively less disruptive and economies tentatively reopening, chances of international worker assignments increasing over the coming years are high.

Craig Rocher, Chartered Accountant (SA) at Tax Consulting South Africa, says in many cases, workers at foreign branches of a multinational organisation may be seconded to a South African branch on a short-term assignment.

With this in mind, he says it is more important that South African employers protect themselves and their expatriate employees against non-compliance with local tax laws and employer tax obligations.

This is because SARS requires local organisations hosting expatriates to withhold tax on their monthly earnings and benefits, irrespective of whether they are paid in their home country, paid in South Africa or both.

He says to ensure full tax compliance, the South African host employer must maintain a theoretical payroll, called a “shadow payroll”, in which the monthly estimated tax liability is calculated based on the home and host country income and benefits paid.

“A shadow payroll is the number one method multinational corporations use for this purpose, but it remains a confusing model to some employers,” says Craig.

In using a shadow payroll, Craig says earnings and benefits paid to expatriates can be mirrored between their home and host company locations to the satisfaction of both tax authorities.

“If the local South African employer does not withhold the correct taxes, as well as collect proof of labour law compliance and statistical data, they may be severely penalised by the respective authorities,” Craig warns.

The need for technical expertise

According to Craig, the complexities of expatriate taxation mean that a shadow payroll is not a complete solution unless backed by extensive technical expertise in global payroll management and employer tax obligations in the specific jurisdictions.

It also requires a good understanding of local labour laws that affect payroll, such as the need to collect workforce compliance data.

“Whether you are establishing a shadow payroll or have expatriates working in South Africa, it is best to source comprehensive technical expertise from a specialist expatriate tax partner with a strong legal team,” says Craig.