Managing Outbound Assignments into Africa storage/Documents/2016/Tax Considerations by... · salary...
Transcript of 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
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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
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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)
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- 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!
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Tax Equalisation
© 2016 (KPMG Services Proprietary Limited), the (South African) member firm of KPMG International, a Swiss cooperative. All r ights reserved
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)
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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
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Gross salaryGuaranteed net salary
What is hypothetical tax?
What is hypothetical tax?
© 2016 (KPMG Services Proprietary Limited), the (South African) member firm of KPMG International, a Swiss cooperative. All r ights reserved
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
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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
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Hybrid Policies
Combination of 3
approaches
Different policies for
different divisions, regions,
grades etc.
Partial equalization/protection
Partial tax assistance
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Expatriate Tax Compliance Services
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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
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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
© 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
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
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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
© 2016 (KPMG Services Proprietary Limited), the (South African) member firm of KPMG International, a Swiss cooperative. All r ights reserved.
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
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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
© 2016 (KPMG Services Proprietary Limited), the (South African) member firm of KPMG International, a Swiss cooperative. All r ights reserved.
Claire Abraham
Tax Manager
KPMG Services (Pty) Ltd