The position for non-executive directors remain complex, despite the recent SARS General Rulings. The general rules confirmed in these Rulings are that non-executive director fees will, with effect 01 June 2017, not be subject to employees’ tax withholding and will be subject to VAT where the non-executive director is liable for VAT, either through voluntary or compulsory VAT registration. The following principles make the position on non-executive directors more complex –
- The source of directors fees are considered to be where the head office of the business is located. Therefore, where the directorship is South Africa, the source is South Africa. See for example ITC 77 (1927) 3 SATC 72; ITC106 (1927) 3 SATC 336; ITC235 (1932) 6 SATC 262; and ITC250 (1932) 7 SATC 46.
- There is a specific Double Tax Agreement clause and which deals with directors’ fees. This clause is generally contained in Article 16 of the OECD model treaty and typical wording reads “Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.” This means that the DTA does not override the source country taxing right and also that the “independent personal services” clause, with certain exemptions, does not find application.
- The non-executive director will have to register for VAT on a compulsory basis, where the VAT Act requirements are achieved. This effectively means that where the expected fees are above R1m for a fiscal year, the registration is compulsory provided there are some meetings held in SA in compliance with the definition of ‘enterprise’ in section 1 of the VAT Act. The VAT vendor must the invoice for services through the issuance of valid VAT invoices and there is normally a bi-monthly VAT compliance requirement, even where no VAT invoices was issued.
- There is still employees’ tax withholding on non-resident non-executive directors. The reason is that they do not fall within the exemption in the Fourth Schedule to the Act. This makes also sense logically, as SARS would have difficulty collecting from someone in a foreign jurisdiction and the tax laws are by its very design aimed at protecting our tax base.
- The non-executive director is allowed to claim expenses against the production of income, which can be done on personal tax assessment. There is necessarily then a refund of PAYE and to the extent which expenses are allowed. We recommend that a basic set of AFS are prepared and to support the tax filing. Also, a South African bank account may be opened and is very useful to receive the tax refund and a prerequisite for receiving a VAT refund.
Many companies with non-executive directors who are non-resident outsource their compliance and planning to provider for an end-to-end solution, including on income tax, VAT, administration and opening of their foreign bank accounts.