Should your company withhold PAYE from your expatriates?
Namibia has a source-basis of taxation. Generally, this means that only income (not of a capital nature) from a Namibian source would be taxable in Namibia. The concept of “source” is not defined in the Income Tax Act No. 24 of 1981 (“the Income Tax Act”). It is therefore necessary to consult case law to determine its meaning.
The courts have consistently held that the source of income from services rendered is the place where the services are rendered. In addition, in terms of section 15(1)(e) of the Income Tax Act, services rendered in the carrying on in Namibia of any trade are deemed to be from a Namibian source irrespective of the residency of the person making the payment or the place from where the payment is made.
The term “trade” is widely defined in the Income Tax Act and includes every employment and trade. It follows that where employment services are rendered by a person in Namibia, that person is carrying on a trade in Namibia. Where that person earns remuneration in respect of the services conducted, that person will therefore earn Namibian-sourced income.
Such a person may be liable for tax in Namibia, subject to any double tax agreement (“DTA”) relief. The Namibian government has entered into some DTAs to prevent the levying of tax twice on the same income by two different countries (double tax). The Namibian DTAs are based on both the Organisation for Economic Co-Operation and Development Model Tax Convention on Income and on Capital (“OECD model tax convention”) and the United Nations Model Double Taxation Convention. For purposes of this article, we consider the provisions of the OECD model tax convention.
In terms of article 15 of the OECD model tax convention, a Namibian inbound expatriate would not be liable for Namibian tax if employment is exercised in Namibia if all of the following requirements are met: the expatriate is physically present in Namibia for less than 183 days in any 12 month period commencing or ending in the relevant tax year; the expatriate’s remuneration is paid by or on behalf of an employer who is not a Namibian resident; and the expatriate’s remuneration is not borne by a Namibian permanent establishment of the foreign employer.
These requirements may be more difficult to meet than one first expects.
The 183 days requirement looks at 183 days in any 12 month period commencing or ending in the relevant tax year. We illustrate the concept by way of an example. Namibia’s tax year for individuals runs from 1 March to the end of February. Where an employee is in Namibia for 100 days during March 2010 to February 2011, but for 200 days during the period July 2010 to June 2011, the 183 days requirement would not be met. This is because the person would have been in Namibia for a period exceeding 183 days for a 12 month period commencing in the 2011 tax year (the period July 2010 to July 2011).
In terms of the commentary on the OECD model tax convention (“the commentary”), the second and third requirements were inserted to avoid the situation where short-term employment income is taxed in one country and the employer paying the remuneration cannot deduct the remuneration paid as that employer doesn’t have a tax presence in that country (i.e. is not registered for tax purposes in that country).
In assessing the second requirement, the commentary looks at the concept of the employer and specifically differentiates between an employment relationship between an employer and employee; and a service relationship where one company provides services to another.
When looking at whether an employment relationship exists between a company receiving the services and the individual providing the services the commentary states that the “host” country should consider the relationship in terms of its domestic law. In situations of abuse of the DTA relief however, the commentary provides for a country to consider the economic employment relationship as opposed to the legal employment relationship (as is set out in the relevant contract of services) that may exist.
In considering whether an economic employment relationship exists, it is necessary to look at the nature of the services provided by the individual. Are the services provided by the individual an integral part of the business receiving the services? Other factors that could point to an economic employment relationship are under who’s instruction the individual operates; who controls the place of work of the individual; whether the remuneration of the individual is directly charged by the legal employer to the economic employer; who provides the tools and materials necessary for the individual to provide the services; who determines the number and qualifications of the persons providing the work; who may select the person providing the work and who may terminate the contract of services; who may impose disciplinary actions relating to the work and who determines working hours and leave arrangements.
If the answer to these questions point to the Namibian company being the economic employer of the individual, this may mean that the expat is subject to Namibian tax and would need to register as a taxpayer. In addition, either the foreign employer or the Namibian company may need to withhold employees’ tax from the remuneration of the individual whether directly or via a shadow payroll.
It is vital for Namibian companies hosting expats to assess whether the expatriates are subject to Namibian tax as non-compliance with the Namibian Income Tax Act may lead to fines and penalties not only for the expatriate but also for the Namibian company if the Namibian company is liable to withhold employees’ tax in terms of the Income Tax Act.