“In many cases, workers at foreign branches of a multinational organisation may be seconded to a South African branch on a short-term assignment,” says Craig Rocher, Chartered Accountant (SA) at Tax Consulting South Africa.
So, it is more important than ever 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.
“A shadow payroll is the number one method multinational corporations use for this purpose but it remains a confusing model to some employers,” says Rocher.
He urges those preparing to host foreign assignees to set up a shadow payroll as an essential component for minimising their tax risk exposure.
The importance of a shadow payroll
With such a system, 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,” warns Rocher.
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.
Remuneration data, including the employee’s base salary, is exchanged between the source and shadow payroll to enable the correct calculation of taxes to withhold in South Africa.
However, because of different tax requirements between countries, information cannot simply be copied directly. Instead, benefits and deductions must be assessed in terms of South African tax legislation and calculated as such.
In addition, differences in submission schedules and timings between the foreign payroll and the South African shadow payroll need to be addressed.
Payroll information from the foreign employer is often only received after local payroll runs are completed, forcing host employers to rely on estimates of the expatriates’ expected earnings, benefits and deductions.
While foreign remuneration may be known, these estimates need to consider seasonal changes, such as annual increases, end-of-year bonuses, exchange rate fluctuations, special incentive rewards, and other variances.
The payroll must also be reconciled regularly to adjust for such changes and the effects they may have on accurate withholdings.
The need for technical expertise
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 Rocher.
Protection through shadow payroll
A shadow payroll offers protection to South African employers by ensuring absolute tax compliance.
Apart from keeping them compliant and avoiding penalties, it also protects their employees from excessive deductions, unnecessary double taxations and personal tax risk.
“As workforces become more globalised and fluid, the need for a shadow payroll in South Africa remains unquestionable, but it must also be implemented with great care and regional expertise to reap its full benefits,” says Rocher.