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Contractor guide to contracting overseas: South Africa

Contractors looking to source contracts in South Africa will find that the regulatory landscape and local customs make operating through an employed solution provider the only real cost-effective and viable option.

Alternative solutions, such as setting up a limited company, will prove costly and may generate more difficulties when applying for a work permit.

This is according to CXC Global’s overseas expert Charles Daw, who explains:

“Amongst other sectors, South Africa has particularly thriving IT, telecommunications and energy industries.

“As a result, it has become a very popular destination for expat workers. So much so that it has had to tighten immigration rules. Contractors seeking work over there are best advised to do so through a solution provider, who can help to navigate problematic regulations.”

Acquiring a work permit in South Africa

Before beginning work in South Africa, contractors are required to attain a work permit. Daw notes that contractors have a few options open to them when deciding upon a work permit, the first of which is a 90-day work permit.

Alternatively, contractors can apply for a critical skills permit, the categories of which get updated every year in accordance with what skills are required within the contractors’ country of work. This permit is particularly handy for contractors in the technology sector, where requirements are always changing.

“There’s also the general work permit which is meant for those who are just coming in to carry out non-specific work, or work that is not covered within the critical skills sector,” Daw adds. “Finally, there is the intracompany transfer, which occurs when a worker is being transferred from one country to another within an organisation – essentially a secondment.”

However, acquiring a permit to contract in South Africa can often prove quite an arduous task, with each route entailing additional requirements.

Local regulations pose problems for contractors

Acquiring a 90-day work permit used to be the most popular option for expat contractors, but the process has been complicated somewhat as a result of legislative changes implemented in 2014, as Daw highlights:

“Expat workers were using the Section 11(2) 90-day work permit to enter and leave the country too freely on short-term contracts. In response – and partly in a bid to protect local jobs - the government brought in a raft of measures in May 2014. As a result, short-term contract work is now viewed as ‘undesirable’ in South Africa and it is very hard to secure contracts in this manner.”

As Daw notes, this ruling makes it essential for contractors exploring opportunities in South Africa to engage with employed solution providers, who are able to work with the new changes in legislation.

“The ruling regarding short-term contracts makes obtaining a 90-day permit extremely difficult. But if the contractor were to engage with an employed solution provider, they would be viewed in all intents and purposes as its employee.

“This way, the contractor is engaged in a long-term position with the solution provider, and is merely working in the country for a 90-day period, as opposed to the assumption that they are on a short-term contract.”

The general work permit is similarly difficult to acquire, as a result of an increase in applications over the past few years. The decision to grant general work permits now rests with the South African labour department, which Daws says is notoriously unyielding.

Intracompany transfer and critical skills permit options

Daw explains that contractors who hold a critical skills permit – essentially an official document which serves to verify all of the contractors’ relevant skills and qualifications - are automatically in a good position.

However, this may not be an option for contractors looking to work on a project at short notice, as Daw explains: “The critical skills permit takes about three months to put together before the contractor can actually apply. They will have to provide medical and radiological checks, as well as numerous other documents.

“They will also have to join up with various associations and have them assess their critical skills and ratify their qualifications. So there’s a lot of paperwork involved and it’s quite a lengthy affair.”

Arguably the smoothest transition comes via an intracompany transfer, whereby there is a lot less paperwork involved because it is considered an internal transfer.

“The intracompany transfer is very popular because it was extended from two to four years as part of the raft of changes in May 2014. The only complication with using an intracompany transfer is that the requirements are seemingly open to the interpretation in the country from which the contractor is looking to operate. However, its use in South Africa is generally straightforward,” notes Daw.

What’s the most effective trading vehicle in South Africa?

Contractors looking to trade independently in South Africa can set up a local private (Pty) company (the equivalent of a limited company). However, this would essentially require them to have a business visa, which requires a significant level of capital investment and a considerable amount of time.

“If you’re simply on a contract which is only likely to run for up to a few years or so, it doesn’t really make sense to set up a company structure,” Daw points out. “Simply put, it takes too long. By the time you’ve set the company up, you will have lost the project.”

Instead, Daw recommends using contract management companies who can ensure that the contractor is able to use the permit that is most applicable to their working arrangement.

How contractors are taxed in South Africa

Daw explains that taxation in South Africa doesn’t differ a great deal from taxation in the UK and other developed economies. Contractors operating through an employment solution will be subject to Pay As You Earn (PAYE) tax.

South Africa has multiple tax bands which determine how much a worker pays in terms of PAYE, which can range from 18% to 40%. However, Daw notes that the majority of expat contractors coming into the country will automatically fall into the higher bracket as they are performing highly skilled, well paid roles.

“However, there isn’t much in the way of social security,” Daw adds. “On top of PAYE, which is pretty standard, you have to pay what is known as a skills development levy (SDL) which is just 1%. Then there’s unemployment insurance fund (UIF), which again is 1% paid by both the employee and employer.”

What expenses can be claimed when contracting in South Africa?

“Pretty much nothing in South Africa is tax deductible anymore,” Daw continues. “There used to be a tax deductible travel allowance, but the work you would have to put in to record your mileage was so high, compared with the return you would receive. It was largely considered more trouble than it was worth.”

Daw does point out that contractors can benefit from tax relief if they have a local retirement, a local pension or local medical aid. Meanwhile, in terms of claiming expenses, almost any allowance is considered a benefit in kind.

“For example, if a contractor was offered $800 per month as an accommodation allowance, or offered actual accommodation, the accommodation would be most cost effective.

Daw concludes: “As a benefit in kind, the $800 is taxable at the contractor’s marginal rate. The provided accommodation is the best route because otherwise the contractor is giving away $320 each month.”

Published: 09 March 2016

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