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Reading Time: 4 minutes

Understanding Potential VAT Obligations for Seconded Employees

Businesses in South Africa engaging seconded employees are cautioned to professionally evaluate their employment contracts to avoid potential pitfalls in Value-Added Tax (VAT). Incorrect handling of these agreements could lead to unexpected VAT liabilities on what is termed as “imported services”. This liability is what Citibank SA and Citigroup Global Markets now find themselves with following the Pretoria High Court’s recent rejection of their plea for guidance regarding VAT obligations on the salaries of their foreign assignees.

More Background Information

Citigroup SA operates as a key division within the worldwide conglomerate Citigroup, while Citigroup Global Markets is a fully owned subsidiary of Citigroup Financial Products. Both entities employ foreign individuals who are seconded to their South African operations from various units within the global Citigroup network.

In their legal submission, the two Citigroup South African entities argued that the financial transactions with their international Citigroup branches represented merely the reimbursement of salary costs disbursed (by the foreign entities) to the employees on their behalf, as the South African entities compensated the foreign entities for providing the services of the seconded employees, who had in turn remunerated those employees. Consequently, they contended that such transactions should be exempt from falling under the scope of VAT, especially considering that the Pay-As-You-Earn (PAYE) tax was deducted and income tax certificates issued to reflect this withholding. Citigroup SA and Citigroup Global Markets maintained that the seconded individuals were, in effect, their employees since they dedicated their “productive capacity” to the benefit of the South African entities. Furthermore, they argued their right to oversee and direct the activities of the seconded employees throughout the term of their assignment.

The South African Revenue Service (SARS) contested the application, asserting that the core issue was not about the employment status of the seconded employees under South African law. Instead, SARS emphasised that the matter was whether or not they were obligated to pay VAT on imported services.

Unpacking The Issue

Addressing the question of whether or not Citigroup SA would be liable for VAT payments on imported services requires an examination of whether the two South African entities qualify as employers according to the definition of employer in the tax legislation.

SARS argued that they do not meet this criterion because the remuneration of the seconded employees was initially paid by the foreign Citibank entity, which the South African entities subsequently reimbursed. In its deliberation, the court observed that the two South African entities did not adequately meet the definitions of “employer” and “employee”.

An employee is defined, among other things, as anyone who receives or is due any form of remuneration. As a result, Citigroup SA’s application had significant shortcomings in that it did not convincingly establish itself as the role of employer to the seconded employees, and it failed to demonstrate that the payments made to the foreign Citibank entities fell under the category of remuneration.

Correctly Considering The Employer of Record

Companies engaging foreign assignees should assess whether this clarification impacts their current position with seconded employees. For companies structured similarly to the case in question, addressing the VAT exposure requires the establishment of a clear employer-employee relationship – one which must be recognised not only under labour legislation but also within the scope of tax regulations.

MMS Group is well-versed in matters of both PAYE and VAT administration and can assist with professional guidance to avoid potential pitfalls associated with international secondments. For more information, please contact our team.