Should you allow your employees to work remotely overseas?

Following the pandemic, remote working has continued to feature, with some employers and employees seeing the benefits. There are plenty of advantages. Flexible working not only saves time and costs, but it can also ramp up productivity and performance.

But what happens when an employee wants to adopt the digital nomad lifestyle and swop Cape Town for Copenhagen, Durban for Dusseldorf, or Johannesburg for Jerusalem?

Whether you can or should allow this will depend on a few things, the most important being taxation.

Know the long-term plan

South Africa has a residence-based tax system, and anyone residing here is taxed on their worldwide income irrespective of where the income was earned. An employee’s long-term plan will determine what kind of tax is payable.

‘As soon as an employee suggests working from abroad, you first need to establish whether they intend to return to South Africa on a permanent basis or not. If the employee has no intention to return, they can formally cease their South African tax residence to become a non-resident for tax purposes.

‘If a company continues to employ a non-resident employee, it simplifies payroll because the company has no PAYE withholding obligation due to the income being non-taxable,’ explains Reinert van Rensburg, expatriate tax legal specialist at Leap Group.

However, if the employee is going to remain a tax resident and return to South Africa in the future, payroll becomes more complex. This is mainly because the expatriate tax provisions of the Income Tax Act, including the foreign exemption, needs to be considered. ‘The correct foreign source codes on the IRP5/IT3(a) need to be used whether the employee is a tax resident or a non-resident for tax purposes,’ adds Van Rensburg.

Think about the contractual arrangements

Individuals who are going to work remotely abroad might be better suited as independent contractors rather than full time employees of the business.

‘If the employee is not under the direct control or supervision of the employer anymore due to their remote working situation, the employee will be deemed an independent contractor and the employer does not need to withhold any PAYE.

‘Independent contractors are also not able to make use of the foreign exemption to minimise or nullify their South African tax liability and will forfeit their labour law rights in accordance with the Labour Relations Act,’ continues Van Rensburg.

Remember, independent contractors are free to work with other businesses and the arrangement could also prove costly in the long run.

Check what you can pay

If you are satisfied that the employee will fulfil the requirements of the foreign exemption, you can pay the employee their salary without withholding PAYE. However, the withholding can only continue for amounts paid up to R1.25 million. Once the employee’s salary for a specific year reaches this amount, you will need to withhold PAYE on any amount exceeding R1.25 million.

Van Rensburg advises that any company allowing its employees to work remotely in another country needs to be clued up on the term ‘permanent establishment’.

‘This essentially renders a portion of the company’s profits subject to tax in the foreign country,’ warns Rensburg.

Don’t forget the other considerations

Taxation and finances aside, there are a few other things to consider before allowing an employee to work abroad.

Remember, you as the employer are still obligated to ensure the health and safety of all your employees, even when they are working remotely. Think about how you will do this if they are in another country.

Also consider whether the employee working remotely presents a higher risk in relation to the secure transfer of data. This can become problematic if the individual processes lots of personal data as part of their job.

Consider how time zones and public holidays will work (will the individual be expected to observe South African public holidays when they are abroad for example) as well as what communication channels you will use.

‘The building blocks for successful remote work starts with trust. There must be mutual respect between employer and employee, and as a business owner, you must be able to measure an employee’s output, regardless of where they are in the world,’ concludes Nadia Rossouw, founder of Nadia Rossouw Public Relations.