The nature of the business of many multinational companies requires them to send their employees to other countries across the globe in order to, among other things, manage and assist with special projects, implement firm-wide systems and ensure a standard level of quality in operations. Such seconded employees are often subject to tax in their host country, yet remain tax residents in their home country.

In order to avoid the potential double taxation of remuneration, many of these companies implement a tax equalisation package with such employees, whereby the tax on remuneration for the seconded employees remains the same regardless of where they are working in the world. In other words, it is agreed between the relevant parties, that the host country company will cover all taxes incurred on remuneration derived in the host country, such that the seconded employee is in the same tax position as if he were working solely at home. This mechanism is seen as useful in attracting many employees to sign up and agree to secondments which is essential to the sustainability of such businesses.

In ABC (Pty) Ltd v C:SARS, as yet unreported, Tax Court (Johannesburg), Case No. IT13775, handed down on 29 April 2016, the Tax Court had to consider issues arising as a result of the tax arrangements entered into between the host country employer (Taxpayer) and its expatriate employees who were seconded from their home countries to work in South Africa under a similar arrangement as described above.

Facts

Without repeating the facts verbatim, the following was relevant:

• the Taxpayer was part of the ABC Group, a worldwide organisation which required its various operations throughout the world to operate on a similar basis and apply similar standards;
• as part of its global business imperative, employees of the ABC Group were required to work for short or medium term periods in foreign countries;
• invariably these seconded employees remained residents in their home countries and continued to submit tax returns there;
• the standard employment relationship within the ABC Group operated on a tax equalisation basis as described above but which essentially involved the expatriate employees paying the exact same effective rate of tax in their host country as they would have paid had they remained in their home country;
• in order to protect the interests of the Taxpayer and the ABC Group, payments were made to identified tax consultancy firms for services rendered in respect of the Taxpayer’s expatriate employees; and
• the employees had no choice regarding the provision of the tax consultancy services as it was one
• of their conditions of employment.

Issues

The parties were in agreement that the following two issues needed to be considered by the court:

• whether the payments made by the Taxpayer to the tax consultants fell within the ambit of paragraph (i) of the definition of “gross income” in s1 of the Income Tax Act, No 58 of 1962 (Act) and, if so;
• whether the payments constituted taxable fringe benefits within the ambit of paragraphs 2(e) or 2(h) of the Seventh Schedule to the Act.

First Issue: whether payments made fell within definition of paragraph (i) of gross income of expatriate employees

The first question which needed to be considered was whether the expatriate employees received or accrued any benefit or advantage from the Taxpayer’s payment of the tax consultancy fees within the meaning ascribed in paragraph (i) of the definition of “gross income”.

The Taxpayer’s main contention that the expatriate employees received no benefit or advantage was that such employees were not placed in a better financial position as a result of the tax consultancy services than they would be without them being provided. Furthermore the expatriate employees’ position was not improved as a result of the Taxpayer’s payments to the tax consultants and the utilisation of their expertise because the employees’ salary and tax obligations remained the same as a result of the tax equalisation arrangement. 

SARS’s main counter-argument was that the tax consultancy fee paid by the Taxpayer in respect of the expatriate employees was a benefit for which they otherwise would have had to pay had the agreement between the Taxpayer and the employees not provided differently. In other words, while there was no outward increased benefit to the Taxpayer’s financial position, there was also no reduction as a result of having to pay such expenses out of their own pockets in the ordinary course.

Keightley J held that SARS’s argument was consistent with the historic case law and that the tax consultancy services which were provided free of charge to the expatriate employees were benefits with a monetary value and accordingly fell within the definition of “gross income”. Therefore the Taxpayer’s argument that there was no actual outward benefit to the expatriate employees’ financial position was not relevant.

Analysis

The very nature of a taxable benefit is that it often involves a salary sacrifice which is a substitution of a cash component of an employee’s overall cost to company remuneration package, for a non-cash benefit, that may result in a lower amount subject to the deduction of employees’ tax. As it happens, paragraph (i) of the “gross income” definition refers to the “cash equivalent value” rather than an “amount”. As the value of such benefits are often difficult to establish, the Seventh Schedule provides for specific calculation methods in this regard. It therefore follows that, in addition to the court’s reasons for its decision on this issue, the Taxpayer’s argument would not, in my view, hold water as it matters not whether employees are placed in a better financial position or not, but rather whether a benefit has been granted which has a “cash equivalent value” calculated in accordance with the Seventh Schedule to the Act. Clearly where payments are made by employers on behalf of employees for services provided to employees for private purposes, such payments will result in a measurable “cash equivalent value”.

Second issue: whether the benefits granted were taxable under either paragraph 2(e) or 2(h) of the Seventh Schedule to the Act

The crux of the second issue was whether the employees had utilised the tax consultancy services for their private or domestic purposes. Importantly, the parties agreed that, to the extent that the tax consultancy services were not wholly utilised for the employees’ private use but also partly for the use of the employer’s business, then such payments would fall outside of paragraph 2(e) of the Seventh Schedule to the Act.

The Taxpayer’s main argument in this regard was therefore that the contractual relationship between it and the employees were such that the Taxpayer was bound to pay the employees’ tax and that the services of the tax consultant were, at the very least, partially for the Taxpayer’s own business purposes. As it so happened, any refunds due by SARS were in fact paid over to the Taxpayer and not the expatriate employees.

SARS on the other hand, stated that when considering the actual services rendered, they were plainly for the employees’ domestic or private use, which was demonstrated in the description of the services in question, namely registration/de-registration as a taxpayer with SARS, preparation and submission of annual income tax returns, and review of annual income tax assessments. In essence these services related solely to the individual tax obligations of each employee and were quintessential to the relationship between SARS and the individual employee taxpayer.

The court agreed with SARS’s contentions and held that if one had regard to the actual nature of the services rendered they were for the employees’ private use, which was to comply with the individual tax obligations of the employees with SARS. Keightley J, however, pointed out that while it may be so that, as between the Taxpayer and its expatriate employees, the intention of obtaining services was also to assist the Taxpayer to fulfil its contractual obligations to those employees, such consideration of the intention of the parties was not the determinative factor.

Keightley J thereafter, referred to CSARS v Brummeria Renaissance (Pty) Ltd 69 SATC 205, in which the Supreme Court of Appeal (SCA) held that even though a receipt or accrual is in a form other than money (in that case the benefit of the use of an interest-free loan), which cannot be alienated or turned into money, it did not mean that the receipt of the right has no monetary value. The Brummeria case stated that the test to be applied in order to determine whether a receipt or accrual has a monetary value is therefore an objective one and not subjective. The learned judge in the ABC case then applied the Brummeria principle in considering from an objective point of view, whether the tax consultancy services were for private use.

Analysis

There is an argument that the application of the objective test in the Brummeria case as to whether something is utilised for private or domestic purposes is slightly misconstrued. This argument is based on the fact that, in Brummeria, the court applied such a test within a slightly different context. Despite this argument, the objective test is nevertheless the correct one as the court should look to the purpose of the cheap or free services and not the intention of the parties in providing such services. This is consistent with the literature on the issue and the parties in ABC agreed to this approach.

What is not clear from the judgment is the exact nature of the business of the Taxpayer and the ABC Group. To the extent that the Taxpayer could prove to the court that its business was of such a nature that it had to second employees offshore but that in order to attract such employees it had to offer tax equalisation packages, then the case may have had a different outcome. In other words, there may be a persuasive argument in favour of the Taxpayer that, in the event of the tax equalisation packages not being offered to employees, then such employees would not agree to secondments which would be irreparably detrimental to the ongoing sustainability of the Taxpayer’s business and therefore not wholly expended for the employees’ private purposes. Unfortunately, the judgment is silent on any such evidence or arguments put forward in this regard.

Conclusion

The judgment re-emphasises that employers must be very careful when making any payments for and on behalf of employees no matter the extent of agreements between the parties and what their intentions are. Even to the extent that such services are provided voluntarily by the employer without regard to the employee’s requirements, such as security services at a key employee’s home, it is often difficult to ensure such benefits fall outside of fringe benefits tax as contemplated in the Seventh Schedule to the Act.

Written By Jerome Brink, Cliffe Dekker Hofmeyr