TAX TREATMENT OF SERVICES PROVIDED TO EMPLOYEES
A recent judgment in the Supreme Court of Appeal (SCA), BMW South Africa (Pty) Ltd v The Commissioner for South African Revenue Service (BMWSA and SARS respectively), dealt with the tax treatment of fees paid to tax consultants by BMWSA (the employer) in respect of expatriate employees.
This judgment is important not only for employers who employ expatriates, but for every employer providing some form of service or other benefit to its employees.
The BMW Group’s business policy required its employees to work for short or medium periods in other countries. Due to the additional costs incurred by expatriate employees when working in foreign countries, the Group applied a ‘tax equalisation’ policy, that the net income of their employees in the foreign countries must be no less than in their home countries.
In order to facilitate the Group’s tax equalisation policy, BMWSA engaged the services of consulting firms to render services to the expatriate employees in relation to their domestic tax obligations. BMWSA paid the consulting firms for these services. In November 2009, SARS queried why the payments made by BMWSA to the consulting firms did not constitute a taxable fringe benefit. BMWSA responded, denying that it constituted an ‘advantage or benefit’. SARS disagreed and the dispute ultimately ended up in the SCA.
The SCA judgment focused on whether the services were a ‘benefit or advantage granted in respect of employment’ and if so, whether they were utilized by the employees for private or domestic purposes.
The SCA rejected the argument that the services were provided to BMWSA, but held that the services were rendered to the expatriates as a benefit or advantage of employment.
With respect to the question whether the services were utilised by the expatriates for private or domestic purposes, BMWSA argued that the services were procured by BMWSA in pursuit of its tax equalisation policy. However, the Court held that the advantage to BWMSA was only peripheral and thus irrelevant. The Court concluded that the services were utilised for the employees’ private or domestic purposes and agreed with SARS that the services constituted a taxable fringe benefit.
What does this mean for employers going forward?
The provision of services to employees can be a tax minefield and this judgment does not necessarily help employers navigate this. For example, what if these services are provided in-house? The rendering of services to employees could potentially be a taxable fringe benefit even where the services are provided by the employer. Does this mean that it is a taxable fringe benefit if an employee is assisted by a knowledgeable person in the employer organisation to comply with his/ her tax compliance obligations?
On the other hand, some services are specifically carved out from the fringe benefit provisions. For example, the provision of counselling or employee wellness programs may not give rise to a tax liability if it constitutes 'services rendered by the employer to its employees in general at their place of work for the better performance of their duties'.
Accordingly, employers should consider the types of services provided to their employees to determine whether such services could give rise to a taxable fringe benefit. It is important to ensure that internal policy documents and communications correctly reflect the nature and details of the ‘benefit’. These types of documents are of particular importance in the context of a SARS audit.
SARS payroll audit
The judgment refers not only to the arguments set out in the taxpayer’s objection to the assessment, but also to its response to the PAYE letter of enquiry. This demonstrates the importance of ensuring that the assistance of tax advisors is obtained at the commencement of a SARS audit, including the response to any PAYE letter of enquiry and the taxpayer’s response to audit findings.
The submission of an objection should also be carefully considered as there are limited instances in which a taxpayer may introduce new grounds of objection when the matter goes to Court. It is thus very important to ensure not only that the factual background is reflected correctly in all correspondence with SARS, but also that the grounds of objection are correctly formulated from the onset of the dispute, as it may not be possible to get a 'second bite at the cherry'.
Inconsistencies between internal policy documents and communications, and in correspondence with SARS, can be detrimental should the dispute proceed to Court.
Practice generally prevailing
BMWSA in its response to the SARS PAYE letter of enquiry, pointed out that it was 'not aware that SARS has ever attempted to tax such necessary payments and the practice generally prevailing appears to be to encourage employers to administer the local taxes to the benefit of SARS'.
However, it does not appear as if this formed part of the taxpayer’s arguments in Court.
The question of whether these services were, in accordance with the practice generally prevailing at the time, not assessed to tax, would be very important in those instances where SARS attempts to treat this as a taxable fringe benefit in respect of previous tax years. SARS may as a general rule not issue additional assessments:
- more than three years after the date of an original assessment;
- more than five years after the date of an assessment by way of self-assessment; or
- if the amount which should have been assessed to tax under the preceding assessment was, in accordance with the practice generally prevailing at the time, not assessed to tax.
As confirmed in CSARS v KWJ Investment (142/2017)  ZASCA 81 (31 May 2018), the taxpayer bears the onus to show, on a preponderance of probability, that the original assessments were in accordance with a practice generally prevailing at the time of the assessment.
Any taxpayer wishing to rely on this would have to gather sufficient evidence to be able to discharge this onus. Accordingly, whether or not it is possible to prevent SARS from taxing these services in earlier years, would depend inter alia on the taxpayer’s ability to gather sufficient evidence in respect of the practice generally prevailing at the time.