Ten years ago, the South African Revenue Service (Sars) queried the fact that BMW South Africa paid for the services of several tax consultants to assist some of its employees with their tax affairs. This simple enquiry led to several court cases, with the final judgment delivered only a few weeks ago.
The saga went all the way to the Supreme Court of Appeal – where the judge ruled that Sars’s interpretation of the Income Tax Act was correct, despite BMW arguing that the only intention of contracting tax consultants was to ensure that its employees paid their due taxes.
At the centre of the disagreement between BMW and Sars was that BMW hired tax consultants in cases where employees were posted to work in different countries, each with its own tax laws and different agreements between countries with regards to tax. In addition, BMW ascribed to a policy in which it assured employees that their net monthly income would be at least equal to the income they received in their home country.
Court documents quote an example of a case where the marginal tax rate is higher in another jurisdiction. BMW will ensure that the impact is nullified by structuring remuneration in such a way that the employee is not worse off in terms of net remuneration.
The postings to different countries were of either short or medium duration, with the employees retaining their status as taxpayers in their home countries.
They were required to submit tax returns and pay all due taxes.
This required a lot of tax planning, with BMW footing the bill. Court papers also showed that BMW paid tax consultants to help people administer their tax affairs, such as submitting their tax returns and responding to any queries.
The court accepted that the tax regime is very complex insofar as it applies to expatriate employees, and had no problem with the services of tax consultants. However, Sars thought the provision of these tax planning services should be seen as a so-called fringe benefit and should be included in the affected employees’ gross income for tax purposes.
In short, Sars argued that each affected employee should have been taxed on the value of the services they received from the tax consultants and that BMW should have deducted pay-as-you-earn (PAYE) tax on the value of these services.
A R2.4m tax bill
In 2009, Sars issued an assessment for the tax years from 2004 to 2009 on the basis that payments to the tax consultants were a taxable benefit in the hands of the employees. A total of R6.8 million was paid to tax consultants, with Sars claiming tax of nearly R2.4 million at a rate of 35%.
BMW objected, telling Sars that the employees received no “benefit” as they were in exactly the same financial position. When the local Sars office persisted, the case was tried in the Tax Court.
BMW argued in court that the only reason for employing the tax consultants was to ensure that Sars got its just dues.
Its reasons seem valid and, when reading the judgment by the Supreme Court of Appeals, one can be excused for thinking that the judge also thought the arguments had merit.
BMW argued that:
- The secondments to another country are not provided to employees as a “benefit or advantage” of employment, nor are the tax services. The employee is required to provide the relevant documentation to tax consultants to enable the filing of tax returns to protect the interests of BMW AG (Germany) in any foreign country. The aim is not to provide a private or domestic benefit to the employee.
- Expatriate employees remain residents in their home countries and will continue to submit tax returns in those countries. As such, they will need to continue incurring professional fees in their home countries to comply with local laws.
- The fact that the expatriate employee is required by BMW to serve in a foreign country results in additional costs that need to be incurred before the expatriate employee may legally work in that country. This includes work permits, visas and, in this case, the filing of tax returns.
- Since the expatriate employee is merely complying with the instructions of its employer (namely BMW SA) it is agreed that the so-called “tax equalisation” process will be applied, which is standard practice within the BMW Group. BMW agrees to take responsibility for the payment of tax in the host country.
- In order to protect the interests of BMW AG and BMW SA, tax consultants are appointed to ensure that SA taxes are not overstated or understated. The employee has no choice in this regard and it is one of the conditions of the secondment agreement.
- The employee receives no benefit from the tax services provided as they are in a financially-neutral position, irrespective of whether the taxes are overpaid or underpaid. The party benefitting from the tax services is BMW SA and not the employee.
- A large component of the fee is directed towards providing assurance to BMW SA regarding its responsibilities in relation to the tax due by the employees, which is ultimately a company cost, and not the cost of the individuals. As such, the services are rendered to BMW and not the employee as certainty in relation to the correct disclosure of taxable income and tax paid, in these circumstances, is the responsibility of the employer and not the employee.
- The services are not for the expatriate employee’s private benefit as it represents a bona fide business expense, directly associated with the placement of the employee by BMW AG in South Africa. There is absolutely no “private or domestic” benefit to the employee.
BMW also argued that “we are not aware that Sars has ever attempted to tax such necessary payments.
“The practice generally prevailing appears to be to encourage employers to administer the local taxes to the benefit of Sars,” BMW argued in court papers.
BMW’s standard employment agreement
It also quoted the provisions of BMW’s standard employment agreement in such cases: “During your international assignment you will be subject to taxation in your host country. By using the method of ‘tax equalisation’ you will be treated as if you were still taxable in Germany.
“The calculation will be done on a yearly basis. The tax payable shall be calculated by an independent external tax consultancy entrusted with this task by BMW. The tax consultancy will also draw up your tax declaration in home and host country during your assignment.”
BMW testified in court that this agreement means that an employee has no choice but to utilise the tax consultant.
The tax consultants testified that they were contracted by BMW and accepted BMW as their client, not the individual employees.
However, the Tax Court ruled that the tax services were a benefit, could be valued in money terms and fell within the law’s definition of gross income. Subsequent appeals to higher courts were all dismissed, with the ruling by the Supreme Court of Appeals finalising the matter.
Thus the precedent has been set and argued – the value of tax services supplied by employers is a taxable benefit in the hands of employees.