Tax Equalisation and Tax Protection. Date: 15 March 2016

Transcription

1 Tax Equalisation and Tax Protection Date: 15 March 2016

2 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 stayat-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 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.

3 Different Tax Policies Secondment Categories The 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;

4 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.

5 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!

6 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.

7 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.

8 Tax equalisation Gross salary Guaranteed net salary What is hypothetical tax?

9 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

10 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.

11 Tax Equalisation vs Tax Protection

12 Hybrid Policies Different policies for different divisions, regions, grades etc. Combination of 3 approaches Partial equalization /protection Partial tax assistance

13 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.

14 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. Remain on South African payroll Employee is responsible for own tax for the duration of the assignment No change to salary package (except daily per diem) SA/Mozambique DTA relief.

15 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; Might not be the best approach in this casecould consider tax protection or tax equalization. No change to salary package (except daily per diem) Remain on South African payroll Employee is responsible for own tax for the duration of the assignment SA/Mozambique DTA relief.

16 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) ZAR Host (Botswana) ZAR Salary 800, ,000 Exemption (section -800,000-10(1)(o)(ii) Taxable income 0,00 800, /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) Tax liability if employee remained in South Africa Estimated tax liability in Botswana Average tax rate 235, , % 22.35% Estimated tax saving 56,947 Employees may favour an assignment to a low tax rate jurisdiction.

17 Example 4 - Tax Equalisation 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 Remuneration South Africa Mozambique Base salary Bonus Expatriate allowance R R TOTAL Step 1: Calculate tax Joe would have paid if n South Africa. Company withholds 1/12 of the annual tax on a monthly basis as hypothetical tax ; Step 2: Calculate assignment net salary; 1. Assignment allowances would not be paid if no assignment, therefore not subject to hypothetical tax. 3 Step 3: Tax gross-up calculation in the host location and cost to company analysis. 1 7

18 Step 1: Calculation of hypothetical tax Step 1 Salary Bonus (estimated) TOTAL R 1 500,000 R 165,000 R 1 665,000 A B STEP 2 Net reference salary Less: Pension contributions: (R 112,500) C Estimated taxable income Tax payable on the first R % on R Less: Primary rebate HYPOTHETICAL TAX PAYABLE R 1 552, R 208, R 348, R 557, (R 13,257.00) R 544, D UNEMPLOYMENT INSURANCE R 1,784 E Guaranteed net reference salary (assignment net salary) = R (A + B - C - D E).

19 Step 3: Gross up calculation (host) and cost to company analysis Step 3 Guaranteed NET cash remuneration (before pension) Add: Assignment allowance NET pay due to Assignee Tax payable by Employer in host country 1 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 1 120, R 200, R 1 320, R 264, R 330, R1 650, R 330, R 214, R1 665, R1 650, R 14, NET excluding Pension deduction Allows the Employer to control the tax position (home & host) thereby reducing risk associated with non compliance 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).

20 Claire Abraham Tax Manager KPMG Services (Pty) Ltd