If company A identifies company B as a Personal Service Provider (PSP) and withholds tax at a rate of 28% before paying over the invoiced amount to company B, and company B then pays C, being the sole owner, shareholder, Director and employee of company B
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
Company B, as employer, or the person making payment to an individual (in respect of services rendered) would have an obligation to deduct employees’ tax from that payment, unless there is directive. The matter is being dealt with in paragraph 11 of the Fourth Schedule to the Income Tax Act.
Paragraph 11(a) allows SARS, having regard to the circumstances of the case, to issue a directive to an employer authorising that employer –
(i) to refrain from deducting or withholding any amount … by way of employees' tax from any remuneration due to any employee of that employer; or
(ii) to deduct or withhold by way of employees' tax from any remuneration …, a specified amount or an amount to be determined in accordance with a specified rate or scale,
… in order to alleviate hardship to that employee due to circumstances outside the control of the
employee or … where the remuneration is paid or payable to a personal service provider ...
Company B should have requested a directive as it intended to pay out the “72% balance remaining as a salary”. Having not done so, it will then only be entitled to a refund on assessment of the company itself.
Under section 23(k) of the Income Tax Act, the company can deduct “any expense which constitutes an amount paid or payable to any employee of such … personal service provider for services rendered by such employee, which is or will be taken into account in the determination of the taxable income of such employee”. The taxable income of the company would then be equal to “the 28% tax withheld by company A” and the tax, payable by the company is at the rate of 28%, on this taxable income.
We don’t know what you mean with the fourth question – “Would the tax refunded accrue to the company?” As the contract is between Company A and company B, the full invoiced amount accrued to the company. The fact that a deduction of 72% of this amount qualified as a deduction, doesn’t change this. The refund, on assessment, is the amount of the tax paid in advance (by way of employees’ tax). The employees tax withheld accrued to the company as gross income.