In a recent Supreme Court of Appeal decision, the court had to determine whether the payment by an employer to tax consultants for providing assistance to the employer’s expatriate employees constituted a taxable benefit, as contemplated in the definition of “gross income” in section 1 of the Income Tax Act read with section 2(e) or (h) of the Seventh Schedule.
The taxpayer (in South Africa) belongs to a group of companies that conducts worldwide operations and, as a result, requires their employees to work for short to medium term periods in locations other than in their home countries. The group furthermore operates on a ‘tax equalisation’ basis which is standard practice within the group. This means that the group ensures that the net income of their employees, in whichever countries they are placed, is not less than in their home countries. As part of this arrangement, the taxpayer agreed to take responsibility for the payment of the tax due by expatriate employees of South Africa.
Due to the complex nature of tax legislation relating to expatriates, the taxpayer engaged the services of consulting firms to assist the expatriate employees. This included assistance with registering and deregistering them as taxpayers, the completion of tax returns and dealing with queries and objections to assessments. The taxpayer paid for these services.
The South African Revenue Service (“SARS”) issued additional assessments for the 2004 to 2009 tax years on the basis that the payments to the consulting firms were a taxable benefit in the hands of these employees.
The taxpayer objected to these findings and contended that no advantage had been gained by the expatriate employees by virtue of the use of the consultancy services and the payment by the taxpayer of their fees. The services were procured by the taxpayer in pursuit of the taxpayer’s own tax equalisation policy to ensure that it paid the correct amount of tax.
SARS disallowed the objection and both the Tax Court and High Court agreed with SARS. Upon further appeal, the Supreme Court of Appeal considered the engagement letter entered into between the taxpayer and one of the consulting firms. Although it appeared from the introductory paragraph that the services were rendered to the taxpayer, the description of services clearly indicated the assistance to be provided to the expatriate employees. These were services that the expatriate employees would otherwise have had to pay for personally. The court, therefore, agreed with the court below that these payments constituted a taxable benefit in the hands of these employees.
There are several other relevant considerations that were not dealt with as part of the judgment. It is unclear whether these matters were not in dispute between the parties:
The takeaway from the judgement is that when employers incur costs that relate in any way to employees, careful consideration should be made of whether the cost potentially results in a benefit or advantage for the employee that was used for their private or domestic purposes. If this is indeed the case, there are a multitude of potential tax consequences which should be considered.
 No 58 of 1962
 BMW South Africa (Pty) Ltd v The Commissioner for the South African Revenue Service (1156/18)  ZASCA 107 (6 September 2019)
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