It pays to go on secondment Caroline Rogers and Hanneke Farrand*

It pays to go on secondment Caroline Rogers and Hanneke Farrand* 18 June 2009 Both you and your employer get tax and exchange controls concessions.

As South African businesses grow in strength and expand to offshore jurisdictions, employees who have an intimate knowledge of their employer's business are essential to the successful implementation of such offshore business operations. The secondment of employees has an additional benefit to the employer, as the employees gain experience in, and knowledge of, the specific offshore market which they can bring back to the South African business. The focus of this article, however, is on another benefit of secondments, namely the concessions granted to both an employer and employee in respect of South African tax and exchange controls when such a secondment takes place.

South African tax
Foreign earnings exemption
South Africa taxes the world-wide income of South African residents. Therefore, an employee will be subject to tax in South Africa for services rendered offshore. However, there is relief available to the employee should he/she qualify for the foreign earnings exemption contained in section 10(1)(o)(ii) of the Income Tax Act, Act 58 of 1962 (the Act). In order to qualify for this exemption, the remuneration must be received for services rendered offshore and the employee must be outside South Africa for a period or periods exceeding 183 full days in aggregate during any period of 12 months, and for a continuous period exceeding 60 full days during that period of 12 months.

Local pension fund
If the employee is nearing retirement age, a further concession granted is in respect of his/her South African pension fund. In terms of section 9(1)(g) of the Act, where an employee has been a member of a South African pension fund and has worked outside of South Africa during the last ten years prior to his/her retirement, there is a reduced tax liability on retirement.

Offshore pension fund
With respect to foreign pension funds, payments received by an employee as a result of contributions made to a registered foreign pension fund whilst working outside of South Africa, should be exempt from normal tax in South Africa if they are not deemed to be from a source within South Africa. In addition, these payments would not be required, in terms of South African exchange controls, to be remitted to South Africa.

Relocation allowance
In terms of section 10(1)(nB) of the Act, where an employer requires an employee to relocate in the course of his/her employment, payment/reimbursement of certain relocation costs (for example, transportation of the employee, his family and their belongings to their new location) will be exempt from tax, and the employee may also be paid a tax-free settling-in allowance. It would be beneficial to determine if the employee would be entitled to a further tax-free relocation allowance in terms of the laws of the jurisdiction to which he or she has been seconded.

Capital gains tax
If the employee decides to sell his primary residence in South Africa before he leaves to render services offshore, he may qualify for the primary residence exclusion. This exclusion exempts the first R1 500 000 of the capital gain or loss incurred as a result of the sale, from the seller's aggregate capital gain/loss. In order for this exclusion to apply, the residence has to be one in which the employee ordinarily resided and which was used mainly for domestic purposes. The Draft Taxation Law Amendment Bill No. 6 of 2009 proposes an amendment whereby no capital gains tax will be due on the sale of a primary residence which has a gross value of up to R2 000 000. If the primary residence is valued above the R2 000 000 threshold, the normal rules will still apply. However, the sale of the employee's primary residence may have implications for the tax residency of the individual and thereby cause the forfeiture of any relief available to the employee in terms of a double taxation agreement.

Double taxation agreement
The employee could obtain relief in respect of foreign tax imposed on his remuneration for services rendered offshore, if he qualifies for exemption in terms of a double taxation agreement between South Africa and the country in which he is rendering services. In terms of Article 15 of the Organisation for Economic Co-operation and Development Model Convention, remuneration derived by a resident (i.e. the employee) of a Contracting State (i.e. South Africa) in respect of an employment exercised in the other Contracting State (i.e. the offshore jurisdiction) will only be taxed in the first-mentioned State (i.e. South Africa), provided certain requirements are met. The employee must be present in the other State (i.e. the offshore jurisdiction) for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, the remuneration must be paid by, or on behalf of, an employer who is not a resident of the other State (i.e. the offshore jurisdiction), and the remuneration must not be borne by a permanent establishment which the employer has in the other State (i.e. the offshore jurisdiction).

South African exchange controls
In terms of Exchange Control Regulation 6, individuals who become entitled to foreign currency are required to remit this money to South Africa within 30 days of accrual. However, the South African exchange control authorities allow an individual who renders services to a non-resident while physically abroad, to retain offshore the remuneration received for those services rendered outside of South Africa. The payment of remuneration must be directly associated with the services that were rendered by the individual while he was outside of South Africa, and this is determined by the South African exchange control authorities on a time spent basis. Split contracts that include a remuneration formula which apportions the employee's gross remuneration package, incentive bonus and leave entitlement on a time spent basis, are an effective way of ensuring that the remuneration paid for rendering services offshore is not in contravention of the Exchange Control Regulations. Split contracts are also useful in reducing the foreign tax liability of the employee if he renders services in two different offshore jurisdictions, by apportioning the remuneration received by the individual for the services rendered offshore, between the two jurisdictions.

Offshore remuneration
An important consideration for an employer is the amount to be paid to the relevant employee for the services rendered offshore. In this regard, it becomes necessary to calculate the amount of remuneration required to ensure the employee is not disadvantaged by his/her secondment as a result of differences in currency and the cost of the standard of living in the offshore jurisdictions. Employers therefore often include a Cost of Living Allowance ("COLA") in an employee's remuneration for services rendered offshore. A COLA may be determined by contacting relevant analysts in the offshore jurisdiction. However, this can be costly and time consuming. An alternative would be to utilise an online program that calculates the relevant COLA. We have found this to be an accurate and efficient way in which to determine the COLA. For example, the program that we use has the ability to calculate a COLA for over 10 000 cities worldwide. It can also determine the COLA necessary to ensure a specific employee's standard of living remains the same. The calculation of this type of COLA includes considerations such as the rental currently paid by the employee, the value of the car used by the employee, and so on.

Once the employee's remuneration has been calculated, the tax implications in the relevant jurisdiction must be considered. In our experience, the appointment of reputable tax consultants in the relevant jurisdictions is essential to ensuring accurate and reliable information regarding the tax implications and available exemptions in the offshore jurisdiction.

As can be seen from above, secondments provide a number of benefits to employers and employees. However, the secondment must be carefully implemented to ensure that the relevant benefits are available, and that the secondment falls within the parameters of the South African tax and exchange control provisions.

*Caroline Rogers is a tax associate and Hanneke Farrand a tax director at ENS