If your company wants to sell specialist machine tools to the Nigerian oil industry, buy Kenya’s agricultural produce, or dig for gold and diamonds in South Africa, you’ll find a growing, affluent market ready to do business across this dynamic continent. Whether you are sending expatriates to run your business interests in Africa, buying local companies, or opening branches of your business locally, employing staff comes hand in hand with payroll obligations.
The South African Example
One of the most attractive economies on the continent is undoubtedly South Africa. Part of the key BRICS axis (with Brazil, Russia, India, and China), South Africa produces goods that are wanted worldwide. The country also makes an excellent base for operations stretching across the continent. But just what are the key South African payroll requirements, and how does general African pay practice vary from other parts of the world?
The main government agency for payroll in South Africa is the South African Revenue Service (SARS), which administers taxation activities throughout the country’s fiscal year, which begins March 1. The agency has a reputation for fair, efficient, and impartial handling of the nation’s tax affairs, and in terms of payroll practice operates a PAYE system that compares well with those of the West.
Africa’s biggest challenges in terms of taxation have always been the “informal” economy, with the World Bank estimating that this accounts for up to 70% of economic activity in sub-Saharan Africa. In order to compensate for this, much effort has been made to ensure that PAYE schemes are made as simple as possible. Tax deduction is therefore often done per pay period to avoid the complication of cumulative calculations. Personal allowances are usually worked into the tax calculation tables that make an initial band of monthly income rated at zero. Qualifying employees are required to submit annual tax returns to ensure that the overall tax paid matches annual income, correcting any anomalies created by income fluctuations within a non-cumulative system.
Employers are required to make deductions and remit them to SARS on a monthly basis. Declarations are made electronically by filing form EMP201, which includes details of all employee income tax deducted at source under PAYE, together with Skills Development Levy (SDL), and Unemployment Insurance Fund (UIF) contributions. The form must be filed in conjunction with a company’s monthly remittance, with the SARS computer system allocating the cash remittance to the correct accounts.
The South African PAYE system follows the simple operating model found throughout Africa, which makes deductions each pay period according to the employee’s monthly income and age range, with amounts set for those under 65, 65-75 and over 75. Standard tax allowances are built into the tables, with anything else being claimed via the annual tax return. In brief the employer responsibilities under PAYE are:
- To deduct the correct tax from the employees’ pay
- To pay correct deductions to SARS on a monthly basis and submit form EMP201
- To reconcile the deductions mid-year and at year end
- To issue tax certificates to employees on termination of employment or at tax year end
Returns can be filed electronically, using a system known as e@syfile™, which is available as a free download from the SARS website. Employers must issue certificate IRP5/IT3 to all employees at tax year end, or to terminated employees within 14 days of leaving. Tax is calculated on income less allowable deductions, including pension contributions (limited to a maximum of 27.5% of earnings or ZAR 350,000), income protection premiums, and charitable donations. Once taxable income is calculated, tax is determined by reference to the tax table relevant to the pay period of the employee. The current rates of tax are:
|Taxable Income||Rate of Tax|
|0 – 189,880||18% of each Rand|
|189, 881 – 296,540||34,178 + 26% on income above 189,880|
|296,541 – 410,460||61,910 + 31% on income above 296,540|
|410,461 – 555,600||97,225 + 36% on income above 410,460|
|555,601 – 708,310||149,475 + 39% on income above 555,600|
|708,311 – 1,500,000||209,032 + 41% on income above 708,310|
|1,500,001 +||533,625 + 45% on income above 1,500,000|
- John’s taxable salary is SAR 26,700 per month. His tax is taken from the table band SAR 26,675 – 26,725 shown in the published tax tables = SAR 4,639
- This is calculated as first SAR 15,823 x 18% = 2,848
- Next SAR 8,888 x 26% = 2,311
- Remaining SAR 1,989 x 31% = 617
- Less primary credit of SAR 1,137
- Total would be SAR 4,639
- This one worked out exactly as the income was the mid-point in the band of income shown in the tax table, usually there would be a very small discrepancy.
For certain types of payment or in certain circumstances, SARS may issue an employer with what is known as a Tax Directive in order to vary the standard deduction calculated by use of the tax tables. Tax directives can be used to charge tax on unusual items such as gratuities paid on termination, death or retirement. They can also be used to suspend PAYE where an individual is suffering hardship due to circumstances outside of their control. In effect, a Tax Directive requires an employer to go into the payroll software and predetermine the outcome so that the payroll system does not perform the statutory calculation. For this reason, it is important to understand exactly how Directives work in your software, as applying one incorrectly may cause an inaccurate payroll calculation.
Your interaction with the authorities in Africa needn’t be low tech. Most Revenue and Social Security authorities now have websites that allow electronic filing of returns and payment details. New innovations are constantly being added, for example, the Ugandan authorities have just extended their e-tax system to allow a broad range of payments to the government, from income tax to traffic penalties, to be made by mobile phone SMS. For larger companies, electronic filing is becoming mandatory in some countries, so picking a payroll product that is able to provide this service will be a prerequisite.
Expanding the scope of Social Security schemes beyond a narrow band of white collar workers is also a relatively new introduction across the continent. The World Bank encourages its expansion by linking coverage of schemes to the provision of development funds. Again, there is a standard simple model of per-pay-period deductions made at the source by the employer, with typical contributions of 5% from employees and 10% from employers. The funds are then invested in a mix of local and overseas investments in cash bank accounts, shares and property. External actuaries are often appointed to monitor the operation and give credibility to the security of the funds held in it.
Once an individual reaches an insured lifetime event, their Social Security fund will repay the total amount of employee and employer contributions plus investment growth as a one-off lump sum, thus providing the total support available to the individual. Insured events may include retirement, death, long-term sickness and disability, marriage for women, and permanent emigration from the country. The intention is for the funds to be managed responsibly by the recipient in order to provide for their needs.
Many of the tax and social insurance authorities across the continent will register individual taxpayers with a photo ID card (including thumbprint), which can be used as an effective identifier. ID cards are particularly useful when a claim is being made against the relevant Social Security fund. I was told anecdotally by a National Social Security Fund Inspector in Uganda that whenever a claim for death benefits was made, the Inspector’s team would visit the deceased’s village and head for the nearest group of children to ask the whereabouts of the deceased. More often than not they would then be lead to a very much alive local who would hurriedly withdraw their claim. The Inspector explained (tongue in cheek) that this was the miracle of the Ugandan Social Security scheme – frequent resurrection of the dead!
The Cash Challenge
The most basic payroll activities in Africa face some very unique and real challenges. The first is identifying employees for payment, particularly those who hold unskilled roles and are paid in cash. It is common for workers to send their brother or cousin to collect their pay, making it difficult for payroll teams to ensure the correct amounts are delivered to the right employees. One Western agency began using thumbprints to confirm that the right person had received the cash.
Cash payments are still the norm in Africa, with up to 90% of transactions being made this way. Such a system, of course, has its security risks. For example, the combination of a sparse bank network and a lack of ATM machines in The Gambia required an up-country station with some 40 employees to be paid in cash monthly. This operation involved two payroll officers traveling on unmade roads for a total of 10 hours with the cash stored in a strong box. During one trip, the team stopped at a supermarket, only to discover a flat tire when they came out of the shop. In the process of changing the wheel, with many passersby helping, the cashbox was “liberated” from the vehicle. The payroll had been watched for several months and the subterfuge preplanned.
Kenya has developed an innovative approach that uses employees’ mobile phones to facilitate payment. The majority of the population now subscribe to some form of mobile payment service, with the most popular being provided by M-Pesa. The service is designed to enable customers to safely and securely send, receive and store money via a basic mobile phone or smartphone app. It has been running successfully for ten years and has ensured that many Kenyans without typical access to bank accounts can now transact business electronically. Around 70% of all financial transactions in Kenya are now done electronically. With a maximum daily transaction value of 70,000 KES (Kenyan Schilling) (about US$680), most local salary payments can easily be made in this manner.
Record Keeping Risks
Managing and storing payroll records in Africa can be a challenge. While secure storage of electronic records is a must to avoid fraud, the electricity supply in Africa can be somewhat temperamental. Making sure that records are safely stored when the power has failed is essential. Equally, there are physical demands to be overcome for keeping paper records in a temperate climate. Simply put, things go moldy quickly. It’s important to ensure records will be legible for the period of time you need to keep them.
Lastly, while great strides have been made across the continent in terms of corporate governance, any payroll system must be robust enough to guard against attempted fraud and outright robbery. A strict separation of duties is vital to ensure adequate protection. It is also very important to demonstrate this system at all times so that everyone with any contact with the basic system is aware that the company takes payroll security seriously. You may find it necessary to keep security checks that you have dropped in other parts of the world to provide sufficient controls. If you have overall control of a payroll processed locally in Africa, regular audit trips to perform unannounced checks are a must. Don’t forget your torch for when the hotel lights go out!