IS TAX ASSISTANCE TO EXPATS TAXABLE OR NOT?
Several companies appoint a tax consultant, often one of the accounting firms, to assist expatriate employees (“expats”) to complete their tax assessments and to deal with associated queries and objections. This service sometimes includes the taxes in both the host and home country. The question is often raised whether the cost of these services constitutes gross income in terms of Section 1 of the Income Tax Act 58 of 1962, read with Section 2(e) or (h) of the Seventh Schedule. We are aware that several clients do consider the cost of the service as gross income, “gross up” the cost and show it as a taxable benefit. Others consider it a company expense.
The South African Supreme Court of Appeal has now answered the question.
The South African Revenue Service (“SARS”) stated that an amount of R 6,795,540 paid by BMW South Africa (Pty) Ltd (“BMW”) to PwC and Raffray Tax Consultants CC for services rendered to expat employees in respect of their domestic tax obligations, constituted a taxable benefit, formed part of gross income, and concomitantly, the expats were liable to pay tax on the amount.
BMW obviously objected to the SARS assessment. The following is a short summary of BMW’s objection and the rationale why the company believed that the cost of the tax services should not be included in gross income:
- The appointment of the service provider was to protect the interests of BMW to ensure that the South African taxes are not overstated or understated. The employee had no choice in the appointment, and it was one of the conditions of the secondment agreement; and
- The party benefiting from the service was BMW and not the expat; and
- The expat received no benefit from the provided services as he was in a financially neutral position given that the company adopts a tax equalisation process. “The employee’s packages are determined with reference to the home country net pay, and BMW agrees to take responsibility for the payment of tax in the host country (South Africa in this instance)”. Importantly, any tax refunds due to an employee from SARS would be paid to BMW and not the expat; and
- The services were not for the expat’s private or domestic purposes as it represented a bona fide business expense directly associated with the placement of the expat by BMW in South Africa.
Before the matter was heard by the Supreme Court, the Tax Court found in favour of SARS. The finding was based on three principles:
- The benefit could be valued in money and thus fell into the definition of gross income; and
- The cost of the service was included in paragraph 2(e) of the Seventh Schedule because it was in the form of a service rendered to the employee, at the expense of the employer and where the service was used for his or her private or domestic service; and
- Such services granted to a local taxpayer would attract tax and therefore, the same treatment would apply to an expat employee.
BMW appealed to the full court of the Gauteng Division of the High Court. This court concurred with the findings of the Tax Court by stating inter alia:
- The court rejected the submission of BMW that expat employees were different to local employees because of the tax equalisation policy; and
- “…the expatriate employees received a benefit or advantage when …(BMW)…paid the tax consultancy firms for tax services” as prescribed by paragraph 2(e) of the Seventh Schedule.
BMW then appealed to the Supreme Court who concurred with the findings of the two previous courts. They considered both inbound and outbound expats and stated:
- The services provided by the tax consultants were in relation to the expat’s tax obligations under the South African tax regime; and
- These were services which the expat would have otherwise had to pay for themselves; and
- The court acknowledged that BMW would have derived “some peripheral advantage” but that this was limited to BMW checking the accuracy of their own calculations.
Given that the highest court in the Republic has now decided the issue, one must fully anticipate that SARS will vigorously pursue this additional revenue stream.