Technical review by Akanksha Singh, CA(SA)
Reading time: 7–8 minutes

A business does not need to open an overseas office to create tax considerations in another country.

A South African company may provide services to clients abroad, send employees to perform work in another jurisdiction, purchase services from an overseas supplier, or operate through a related company outside South Africa. As business becomes more connected across borders, where activities take place can become as important as where the company is registered.

South Africa operates on a residence-based tax system. Subject to certain exclusions, South African tax residents are taxed on their worldwide income, while non-residents are generally taxed on income from a South African source.

This means that operating across borders can create tax considerations in more than one country. The position will depend on the nature of the activities, the countries involved, and any applicable tax treaty.

The client is overseas. So where is the income taxed?

Consider a South African consulting business that provides services to clients in several countries or even a single client in one other country.

The client may be based outside South Africa, but that alone does not determine where the income is taxed. The location and nature of the activities performed can also become relevant.

For example, if employees perform services in another country, the tax position may depend on a range of factors, including their tax residence, the domestic rules of the country where the work is performed, the applicable Double Taxation Agreement and the circumstances of the employment.

The customer’s location is therefore only one part of the picture. Once more than one tax system becomes relevant, another question arises: what happens when the same income is taxed in more than one country?

An income stream can have more than one tax consideration

A South African tax resident may earn income from another country and remain subject to tax in South Africa. At the same time, the country in which the income arises may also have taxing rights. This can create the potential for the same income to be taxed in both countries.

South Africa has Double Taxation Agreements with various countries that can help determine how taxing rights are allocated. Where the relevant requirements are met, relief may be available through mechanisms such as a foreign tax credit. The availability and treatment of that relief depend on the applicable treaty, domestic tax legislation, and the nature of the income.

To understand the full tax picture, we need to look beyond a single country. The interaction between the two tax systems matters.

A business that considers this when entering into an international arrangement is better placed to understand the financial consequences before generating income and incurring costs.

As the business develops, the tax position can change

Cross-border arrangements rarely remain static.

A business may begin by providing services directly from South Africa. It may later employ people in another country, establish a local office, or create a separate entity to support its activities.

The commercial rationale for these changes may be clear. Less visible, however, are the tax implications of shifting operations, which can significantly affect both cash flow and profitability.

Depending on the circumstances and the applicable treaty, activities carried out in another jurisdiction may also raise questions around whether that business has created a permanent establishment there and whether that jurisdiction may have taxing rights over part of the business’s profits.

Tax implications therefore need to be considered alongside the commercial decisions, rather than after the operating model has already changed.

What happens when related businesses transact?

Cross-border activity can also arise within a group.

A South African company may provide management services or exercise oversight over a foreign subsidiary. A foreign company may manufacture products for its South African related party. One entity may provide financing, technology, or other support to another.

Although the commercial rationale is clear, the pricing of transactions between related parties remains a critical consideration.

The nature of the transaction can have different tax implications. Fees earned by directors exercising their functions in a foreign country may be treated differently from fees earned for management services performed on behalf of a foreign entity.

This is also where transfer pricing becomes relevant.

When international transactions occur between connected persons or associated enterprises, the pricing of goods, services or financing can affect the profit recognised by each entity. South African tax rules generally apply the arm’s-length principle to relevant transactions, broadly requiring the terms to reflect those that would have applied between independent parties.

Consider a company that manufactures and patents a product locally before opening a foreign store to sell that locally manufactured product. The functions performed, risks assumed, and prices charged between related businesses can influence how profit is allocated and, ultimately, how the group is taxed.

A company’s tax position can therefore be affected not only by how the company performs on its own, but also by how different parts of the group transact with one another.

The more connected the business becomes, the more information matters

By this point, the issue is no longer simply where the customer is located or where the company is registered. It is about how the different parts of the business operate and interact across jurisdictions.

Contracts, invoices, funding arrangements, related-party transactions, foreign taxes paid, and information about where services are performed may all become relevant when determining the appropriate tax treatment.

The business may also need to consider the filing and reporting requirements that apply in each jurisdiction.

As the number of cross-border transactions increases, keeping the underlying information consistent becomes increasingly important. The allocation of income, costs, and responsibilities across the business all directly shape its overall tax profile.

The BluAxis Perspective

Cross-border activity can develop gradually.

A service provided to an overseas customer can become a regular international revenue stream. Employees may begin working in different jurisdictions. Related companies may start providing services or funding to one another.

While each decision may make commercial sense on its own, together they can change the financial and tax position.

A financial and tax perspective helps management consider these relationships as part of the wider business, rather than viewing each transaction or jurisdiction in isolation.

BluAxis brings the professional financial judgement needed to navigate these complexities, ensuring management clearly sees how cross-border operations impact their tax and financial position.

When a business crosses borders, understanding where activities take place, where income arises, and how the different parts of the business interact becomes part of understanding the business itself.