Marvelous Tapera 
A DIRECTOR can be classified as a non-executive directors (“NED”) or executive director. An executive director is a full-time employee of the company with day-to-day responsibilities. On the other hand, a NED is a member of a company’s board of directors who is not part of the executive team. 
They do not engage in the day-to-day management of the organisation but are involved in policymaking and planning exercises. NEDs are responsible for monitoring the executive directors and advising the company stakeholders.
This position is recognised by the Income Tax Act. It subjects the earnings of the executive director to payroll taxes while treating those of NEDs as business income subject to corporate income tax (“CIT”).
Therefore, for the period prior to January 1, 2020, NEDs would be required to submit an income tax return and pay tax on their fees at 25,75 percent.
This tax would be reduced by 20 percent withholding tax deducted by the company at source.
The 25,75 percent tax burden was altered with effect from January 1, 2020 to make the 20 percent withholding tax deducted by the company a final tax. A further change is in the horizon.
The minister of Finance and Economic Development Mthuli Ncube has hinted, in his 2021 National Budget Statement, some housekeeping on the 20 percent final withholding tax.
If such proposal is to become law, there will be a flurry of executive directors jostling for NED positions in a bid to keep their taxes down.
Ncube stated that “board fees and allowances received by NEDs who are employed elsewhere are liable to employees’ tax.
“In order to determine the appropriate rates of employee’s tax on such fees and allowances, the payer requires information on remuneration accruing to the NED from the employer. The process to acquire information on remuneration accruing to the employee is cumbersome for some companies, and also violates confidentiality in employment contracts.
“In order to minimize the burden of compliance, I propose that all amounts and benefits accruing to NEDs be subject to a final withholding tax of 20 percent.”
It appears from this statement that 20 percent final withholding tax will be applied on all the amounts and benefits accruing to a NED even from being employed elsewhere, and this is effective January 1 next year.
Impliedly, for periods prior to January 1, 2021, NEDs’ fees and employment income elsewhere are to be regarded as employment income subject to PAYE.
We were of the view that for such periods, this only applied to fees and employment income payable by one payer and not when fees and remunerations are paid by different persons.
Therefore, where the NED received anything over and above their fees, which would be in the nature of remuneration normally given to employees, they would be treated as employees and thus, be liable for PAYE.
Examples of these payments include, retainer fees, fuel allowance, home security services, accommodation, cellphone etc.
The fees and remuneration should be paid by the same person for this to apply. The minister’s statement is interesting in that any NED who was also an employee of another company was liable to employees’ tax on both the NED fees and the remuneration from employment.
However, with effect from January next year, this ceases to apply and everything is treated as fees subject to 20 percent final withholding tax.
There are two critical issues arising from this.
Firstly, NEDs who are also employees have received a lot of relief in terms of the total effective tax paid. It is important to note that most individuals who sit on the board of directors are most likely executive members in other companies, that is, if they are employees.
This means that most of them are probably in the highest tax bracket, which is 40 percent. The proposal by the minister reduces the effective tax rate to 20 percent on the total income received by NEDs.
This begs one question of whether it is what the minister intended to achieve with the new proposal.
There is potential for abuse for this law as individuals may arrange non-executive directorship appointments in order to benefit from the lower tax rate.
The second issue is whether what the minister implied to have been the prior treatment for NEDs who received/ receives employment income from a separate company is accurate or the prevailing practice.
The implication of this is that NEDs who also held executive directors’ position may not have been complying with the law if they did not aggregate fees and remuneration for purposes of paying PAYE, thereby potentially creating tax arrears in the form of principal tax, penalty and interest.
Such NEDs and their employers will have to deal with legacy tax issues regarding periods prior to January next year.
In conclusion, NEDs seem to have been benefiting from the new legislative changes announced at the beginning of this year. They were relieved from submitting income tax returns and paying income tax. This reduced the administrative burden.
The government has gone one step further by proposing that remuneration from employment for NEDs be taxed at a lower rate.
It may seem the government solved one problem by creating another one or it could have been an error.
However, the Finance Bill has not yet been gazetted and there may be more clarity or changes regarding the matter at hand.
Meanwhile, Matrix Tax School (Pvt) Limited will be hosting a webinar seminar on “Principles, Practices and Recent Developments (2021)” on the 20th of January 2021. Do not miss out on this very important event!!!
● Tapera is the Founder of Tax Matrix (Pvt) Ltd and the chief executive of Matrix Tax School. He writes in his personal capacity.
