managing outbound assignments into africa storage/documents/2016/tax considerations by... · salary...

Tax Equalisation

and Tax Protection

Date: 15 March 2016

Different Tax Policies

Laissez Faire

The expatriate is

responsible for his

own taxes in the

home and host

countries. The

expatriate can be in

a better or worse off

position than if he

had stayed in the

home country.

Tax Protection

The employer will

reimburse any tax

liability which is

higher than the stay-

at-home liability

would have been.

The expatriate can be

better off, but never

worse off than had he

stayed in the home

country.

Tax Equalisation

© 2016 (KPMG Services Proprietary Limited), the (South African) member firm of KPMG International, a Swiss cooperative. All r ights reserved

The employee receives

the same net salary and

pays the same amount of

tax as if he had continued

to work in the home

country, and is in no

better or worse off

position than if he had

stayed in his home

country.

Different Tax Policies


Secondment CategoriesThe type of international assignment and duration thereof may vary according to business needs. The policy should therefore clarify the types of international assignments that will be covered by the policy.

For example:

• An international Secondment will fall into one of the following categories, based on the

duration of the Secondment:

- Short-term Business Traveler: An employee on an international business trip that is

expected to last for a short period. A short-term business traveller is generally not

accompanied by his/her Dependents;

- Short-term International Secondment: An employee on an international Secondment that

is expected to last for a period of 3-4 months, with a possible extension of up to six months.

An employee on a short-term Secondment is generally not accompanied by his/her

Dependents, but exceptions can apply;

Different Tax Policies (cont)


- Long-term International Secondment: An employee on an international Secondment that

is expected to last for a period of more than 6 months, but less than three years. An

employee on a long-term Secondment is generally accompanied by his/her Dependents.

Laissez Faire

The expatriate is responsible for paying his own personal income tax in the home and host countries.

Does this mean the employee is responsible for all taxes associated with his assignment, including employees’ tax?

Does this mean that the employer can absolve itself from paying employees’ tax?

Does the employer frees itself from any risk associated with the expatriate?

What happens if the employee remains on the home country payroll? Does he even need to pay tax in the host country?

Does this mean the expatriate should be expected to file his own tax return?

What about local laws? Some countries have no mechanism for individual to file own return. Know your local laws!


Tax Equalisation


Objective: to ensure that the Secondee’s income tax and social security (where applicable)

liabilities are no more or no less than they would have been had the Secondee not

accepted an international secondment;

The Secondee can be tax equalised on employment income only, or employment income,

plus other income.

A Home Country hypothetical tax calculation will be performed to determine the amount

of income tax and social security (where applicable) that the Secondee would have paid on

his/her “Stay-at-Home” employment income (i.e. his/her employment income excluding

secondment related allowances and benefits) had he/she not accepted an international

Secondment.

Secondee’s net pay entitlement is reduced by the hypothetical tax and he/she will have no

entitlement to the hypothetical tax amount.

The Company will assume responsibility for paying the Secondee’s actual tax liabilities in

both the home and host countries on all tax equalized income.

The Secondee will be responsible for paying his/her tax liabilities on all other income.

Tax Equalisation (cont)


The appointed tax adviser will prepare a year-end tax equalisation reconciliation; Secondee must not have been disadvantaged or benefited from a tax perspective as a

result of his/her Secondment; A “Stay-at- Home” tax calculation will be performed and compared to the hypothetical

tax calculated by the company; If the “Stay-at-Home” tax is more than the hypothetical tax deducted, the Secondee

will be required to pay the difference to the company; If the “Stay-at-Home” tax is less than the hypothetical tax deducted, the company will

pay the difference to the secondee.

Tax equalisation


Gross salaryGuaranteed net salary

What is hypothetical tax?

What is hypothetical tax?


What is it?

• It is NOT a real tax

• It is a “hypothetical” amount calculated with reference to the home country’s tax rates

What is it used for?

• Calculate guaranteed net salary

• Can be used to create a provision for tax expenses incurred by company in host country

• Can be used to compare tax expenses in home and host country

Tax Protection


Secondee will be tax protected on employment income only, or employment

income, plus other income;

Objective: Ensure that the secondee’s income tax and social security liabilities

(where applicable) are no more than they would have been had the Secondee

stayed at home;

Secondee pays tax liabilities in the host and home countries;

Company undertakes to reimburse the Secondee for all taxes paid, in host and

home countries, in excess of the secondee’s “Stay-at-Home” hypothetical tax

liability.

“Stay-at-Home” hypothetical tax calculation compared to tax actually paid in

home and host countries. If the total tax liability is higher than the” Stay-at-

Home” hypothetical tax liability, the Company will reimburse the employee the

difference.

The Company covers the Secondee’s tax liability on any reimbursement paid.

Tax Equalisation vs Tax Protection


Hybrid Policies

Combination of 3

approaches

Different policies for

different divisions, regions,

grades etc.

Partial equalization/protection

Partial tax assistance


Expatriate Tax Compliance Services


Pre-departure tax counseling meeting to assist the secondee in understanding his/her ongoing obligations in the home country (including reporting obligations);

Post-arrival tax counseling meeting to assist the secondee in understanding his/her obligations in the host country;

Host country tax registration, if required; Host country income tax return preparation (for all tax years impacted by the

secondment); Home country income tax return preparation (for all tax years impacted by the

secondment); Tax equalisation settlement calculations; Review of notices of assessment from the Revenue Authorities to determine

accuracy; Lodging objections to incorrect assessments issued by the Revenue Authorities; Pre-departure tax counseling meeting in the host country prior to repatriation; Post-arrival tax counseling meeting in the home country upon repatriation.

Example 1 – Laissez Faire and Treaty Relief

Employees are assigned from South Africa to Mozambique on a short-term assignment (not more than 6 months/183

days).

Employees meet all three requirements for relief under the South Africa/Mozambique Double Tax Agreement.

Employees remain liable to tax in South Africa only for the duration of their short-term assignment.

Employee is responsible for

own tax for the duration of the

assignment

Remain on South African

payroll

© 2016 (KPMG Services Proprietary Limited), the (South African) member firm of KPMG International, a Swiss cooperative. All r ights reserved.

No change tosalary package(except daily

per diem)

SA/MozambiqueDTA relief

Example 2 – Laissez Faire and no Treaty Relief

• Employees are assigned from South Africa to Mozambique on a longer-term assignment (more than 6 months/183

days), but return to SA throughout their assignment;

• Employees do not meet all three requirements for relief under the South Africa/Mozambique Double Tax

Agreement;

• Employees are taxable in Mozambique;

• Employees remain liable to tax in South Africa, but can claim relief under section 6quat - cash flow issue;

Employee is responsible for

own tax for the duration of the

assignment

Remain on South African

payroll


No change tosalary package(except daily

per diem)

SA/MozambiqueDTA relief

Might not be the best approach in this case-could consider tax protection or tax equalization.

Example 3 – Tax Protection

Employee is sent from South Africa to work in Botswana on a 2 year secondment;

Employee is South African tax resident - subject to tax on a worldwide basis in South Africa;

Employee spends more than 60 days and an aggregate of more than 183 days in Botswana during a 12 month period;

Qualifies for relief in terms of section 10(1)(o)(ii) in South Africa.

Home (SA) Host (Botswana)

ZAR ZAR

Salary 800,000 800,000

Exemption (section -800,000 -

10(1)(o)(ii)

Taxable income 0,00 800,000

Tax liability if

employee remained

in South Africa

Estimated tax liability

in Botswana

Average tax rate

235,797 -

- 178,850

29.47% 22.35%

Estimated tax saving 56,947

2015/2016 South African tax rates applied

2015/2016 Botswana non-resident tax rates

applied

For purpose of the calculation we have

assumed an exchange rate of 1:1 (ZAR:PULA)

Employees may

favour an

assignment to a

low tax rate

jurisdiction


Example 4 - Tax Equalisation

1. Assignment allowances would not be paid if

no assignment, therefore not subject to

hypothetical tax.

Employee on assignment to Mozambique for 2 years;

Qualifies for foreign-earned income exemption in respect of employment income;

Contributes 7.5% of his pensionable salary to a pension fund in South Africa.

Joe Soap’s RemunerationStep 1:

Calculate tax Joe would havepaid if n South Africa. Companywithholds 1/12 of the annual tax

on a monthly basis as‘hypothetical tax’;

1

Step 2:

Calculate assignment net

salary;2

Step 3:

Tax gross-up calculation in the host location and cost to

company analysis3


South Africa Mozambique

R R

Base salary 1 500 000 1 500 000

Bonus 165 000 165 000

Expatriate

allowance- 200 0001

TOTAL 1 665 000 1 865 000

1

7

Step 1: Calculation of ‘hypothetical tax’

STEP 2

Net reference salary

Guaranteed net reference salary

(assignment net salary)

=

R 1 006 394.41

(A + B - C - D – E)

Estimated taxable income

Tax payable on the first R 701 301

Tax @ 41% on R851 119

R 1 552,500.00

R 208,587.00

R 348,991.59


R 557,578.59

(R 13,257.00)

R 544,321.59 D

Less: Primary rebate

HYPOTHETICAL TAX PAYABLE

UNEMPLOYMENT INSURANCE R 1,784 E

Step 1Salary

Bonus (estimated)

TOTAL

R 1 500,000

R 165,000

R 1 665,000

A

B

Less: Pension contributions: (R 112,500) C

Step 3: Gross up calculation (host) and cost to company analysis

R 1 120,678.41Guaranteed NET cash remuneration (before pension)

Add: Assignment allowance

NET pay due to Assignee

Tax payable by Employer in host country1

Tax gross-up (fringe benefit)2

ESTIMATED TAXABLE INCOME

Annual tax liability in Mozambique

Difference between hypo tax deducted and actual tax

Initial cost to company

Assignment cost to company

Estimated additional Cost to Company

R 200,000.00

R 1 320,678.41

R 264,135.68

R 330,169.60

R1 650,848.01

R 330,169.60

R – 214,151.99

R1 665,000.00

R1 650,848.01

R 14,151.99

1. 2016 tax rate in Mozambique, assume assignee is not resident in Mozambique

2. Calculation based on the traditional gross-up methodology (i.e. tax on tax)

Allows the Employer to control

the tax position (home & host)

thereby reducing risk

associated with non

compliance

Step 3

NET – excluding

Pension deduction


Claire Abraham

Tax Manager

KPMG Services (Pty) Ltd

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