S.Africa: Deemed loans under transfer pricing seen as a dividend declared on 1 January 2015

Deemed loans under transfer pricing seen as a dividend declared on 1 January 2015

Authors: Okkie Kellerman, Jens Brodbeck and Arnaaz Camay (ENSafrica)

South African taxpayers who made a transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... adjustment in previous years of assessment will be required to pay dividend tax at the end of 28 February 2015.

Under the old transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... rules, a primary transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... adjustment triggered a secondary adjustment in terms of a deemed loan in the hands of the relevant South African taxpayer; i.e. the amount “over paid” or “under charged” to the relevant non-resident connected person was deemed to be a loan to that foreign-connected person, on which arm’s length interest was deemed to have accrued to the South African resident.

The new section 31 of the Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... Act, applicable from 1 January 2015, now provides that the deemed loan plus accrued interest – to the extent that these items were not “re-paid” by the non-resident before 1 January 2015 – must be deemed to be a dividend in specie that was declared and paid by that resident to that non-resident on 1 January 2015.

Accordingly, South African companies that have such a deemed loan will now be liable to pay 15{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} dividends tax on the capital, plus deemed interest, by the end of February 2015.

The time period for the resident taxpayer to calculate and pay dividends tax where an existing “deemed loan” that will arise based on a secondary adjustment for, in particular, years of assessment ending on 31 December 2014, is therefore very short. Taxpayers only have until 28 February 2015 to determine the amount of these adjustments as at 31 December 2014, as well as the dividends tax payable thereon.