Lockdown: Tax considerations for those continuing with operations

Will the ‘tools of the trade’ be regarded as fringe benefits?
And will an employee stranded in a foreign country for longer than 183 days have to pay tax in that country? Image: Shutterstock

Many businesses have had to make urgent arrangements to provide key employees with fibre and internet options to enable them to work from home. Others have had to supply staff with medical supplies. This all raises the question whether the provision of such benefits will be regarded as a taxable benefit in the employee’s hands.

Shohana Mohan, member of the personal tax and employment tax committee at the South African Institute of Tax Professionals (Sait), advises companies to seek guidance on the circumstances under which the provision of such benefits will not attract fringe benefit tax.

Joon Chong, tax partner at Webber Wentzel, has analysed the tax implications for employers and employees in the instance where the employer provides fibre and internet services to their key employees.

This has become a necessity in the current environment where it is critical for businesses to have key employees working from home in order to keep operations going.

Three alternatives

Chong says employers have three alternatives when it comes to providing fibre where it becomes necessary, but each comes with its own tax audit risks for the company.

1. Employees sign up for fibre/internet

She says one alternative is for the employees to enter into agreements with fibre and internet service providers and claim reimbursements for business use of the services.

“The reimbursement can be subject to a maximum cap,” she says, adding that the employee would need to provide supporting documents for the business usage claim. “This could be set out in the employer’s fibre business usage policy.”

2. Employers sign up for fibre

The second alternative is for the employer to enter into an agreement with fibre service providers. Personal use of the fibre package will however be subject to employee paye-as-you-earn (PAYE) tax.

“This is more difficult to implement,” says Chong. “Employees with existing fibre packages will also need to change to the fibre provider packages entered into with the employer.”

In addition, the employer-contracted fibre provider might not have fibre services in a particular physical location where an individual resides.

“Employers would need to negotiate and enter into agreements with fibre providers, or check business usage, which is administratively intensive,” she notes.

Chong says the tax risk is on the employer if no amount of the service is subject to PAYE, and it is even more difficult to prove that the internet service is used mainly for business purposes if the employee has existing fibre services.

It may be less difficult if new fibre services are obtained in order to work from home due to the current circumstances.

3. Use cash allowances

The third option involves cash allowances.

Chong however advises against cash allowances being paid to employees for these services without any PAYE on the amount being withheld.

“It is risky and a red flag,” she says. “We would not recommend this, even with a detailed employer business fibre policy.”

The benefit of the cash option – with PAYE withheld – is that the costs for employers and employees are certain, with minimal tax audit risk.

It also minimises the risk of penalties, she says.

Globally-mobile employee risks

Companies with a globally-mobile workforce may also encounter additional assignment costs, because of unintended or extended stays in host locations that can trigger specific tax consequences.

Mohan, an expatriate and employment tax specialist, says in light of the Covid-19 pandemic, an employee sent on a short assignment who is required to extend their stay in a foreign country beyond the 183-days presence test may become liable for tax in the host country.

Most double taxation agreements exclude remuneration from being taxed in a host location if the employee spends fewer than 183 days there and is not paid by the employer in the foreign country.

There are indications that some revenue authorities are considering tax concessions and this will need to be monitored on a daily basis, says Mohan.

She notes that the remuneration that was initially agreed upon for the offshore assignment will have to be reviewed, depending on the marginal tax rates in the home and host countries.

The employer will have to determine if it is necessary to make any adjustments to ensure that the employee is not out of pocket as a result of any additional taxes that may become due in the host country, she says.

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