Some companies engage expatriates to take advantage of the experience and expertise expatriates possess, which is usually critical for the profitable and continued growth of businesses. As the year encroaches towards the end these employers are sometimes faced with a predicament on how best they can reward these hardworking expats. One easy route which most employers seem to be unfamiliar with is to pay expats tax free bonuses. The Income Tax Act actually provides for payment of tax-free bonuses for non-citizen employees. This is however one particular aspect that is uncommon in typical discussions on PAYE issues. Allow me to help you understand what the tax law says about this matter and how employers can leverage on the exempt bonus when rewarding expatriates. In this article, words importing the masculine shall be deemed to import the feminine.
Enter the expat
Firstly, what needs to be clarified is the fact that there are no tax laws that restrict or limit any employer to pay an employee a bonus. The fact that one employee is a citizen and the other is an expat is inconsequential. This fact is clearly expressed by the Act as it defines an employee as, ‘any person (other than a company) who, in respect of an employment receives remuneration from an employer.’ As you can see from the definition, the key factor is the existence of an employer-employee relationship. Hence, an expat is by no means any different from any other employee with the only exception being the citizen status.
Secondly, the expatriate’s contract should represent a normal employer to employee relationship. This technically means employers should exercise the right to control the expats i.e., the expat should be working under the directorship or control of his employer or other designated person. In the absence of such control, expatriates may be deemed to be independent contractors subject to income tax from some trade.
Pay the bonus!
Now that we are clear that for tax purposes, expatriates are not different from any other employees, this technically means expatriates can actually receive any other benefits as any other employee including bonus payments.
Generally, a bonus payment depicts any payment received by an employee in addition to his salary at the discretion of the employer. Such payments are included in the wide scope of employment income as dictated by the Act. This means such payments should be taken into consideration in determining an employee’s PAYE. However, the Act further provides that ‘where a non-citizen employee is entitled to a bonus or gratuity under a contract of employment, one third of such bonus or gratuity shall be excluded from his or her gross income.’
The exemption explained
In essence, the above quoted provision can be reduced to mean that 1/3 of bonus payments to expatriates is exempt from PAYE. This is however with a few strings attached. BURS is impowered to assess the reasonableness of such payments and exercise its discretion to either allow or disallow the exemption. This is primarily based on their assessment of the period of employment, nature of employment, the salary payable and a measure of retirement benefits generally prevailing at that time. In practice, if such payments are paid at the end of each contract or after say 3 years, the exemption can be obtained without doubt. Additionally, the terms of the bonus must be enshrined in the contract so as to ensure certainty of the tax treatment.
Expatriates are employees as any other citizen worker but they have a special provision in the Act which exempts part of their bonus, as enunciated above. It is also critical to note that employers should have control over the expatriates for them to qualify as employees as well as the bonus payment. The one third exemption is provided in law and there is no reason why it must not be utilised.
Well folks, I hope that was insightful. As Yours Truly says goodbye, remember to pay to Caesar what belongs to him. If you want to join our Tax WhatsApp group or to know about our 9 Tax e-books, send me a text on the cell number below.