South Africa Holds Tax Equalization Payments Taxable

The Supreme Court of Appeal of South Africa ruled that payments made by an amployer for consulting services such as tax preparation fees to expatriates are taxable fringe benefits.

In a case decided 6 September 2019, the Supreme Court of Appeal of South Africa held that payments by an employer for consulting services to expatriate employees were taxable fringe benefits.  The case is BMW South Africa v. Commissioner for the South African Revenue Service.

As is frequently done by companies with employees on expatriate assignments, BMW followed a tax equalization process designed to ensure that the employees are not tax disadvantaged from the assignment.  In doing so, BMW hired big 4 consulting firms to assist the employees with tax matters, including registration as taxpayers, preparation and submission of income tax returns, review of annual income tax assessments, preparation and submission of provisional tax returns, and resolution of disputes with the tax authorities. 

The South African Revenue Service (SARS) took the position that the payments made to the consultants were taxable fringe benefits to the employees. BMW argued that the services were in fact for its own benefit in order to ensure that South African taxes were neither overpaid nor underpaid and that employees did not run afoul of the tax authorities.  It also argued that the employees did not receive a benefit because they had no choice but to accept the services, and that the employees were placed in a financially neutral position with respect to their taxes.

The court rejected these arguments, holding that ancillary benefit to the employer was not enough to remove a payment from treatment as a fringe benefit when the employees received services for which they would have had to pay significant amounts had BMW not provided them. Accordingly, the entire amount paid was taxable to the employees.

This position is similar to that taken by the United States Internal Revenue Service.

Read More

How This Impacts Mobility

Employers with expatriate employees in South Africa must begin including in their incomes the value of tax equalization services provided to the employees, with consequent tax gross-up issues. 

Advertisement