S.Africa: Proposed Changes to Secondary TP Adjustment
Proposed Changes to Secondary 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
South Africa’s National Treasury and the South African Revenue ServiceThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... (SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently...) recently released the draft Taxation LawsTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public... Amendment Bill 2014 (Bill). One of the key proposals in the Bill is to change the secondary 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 mechanism from a deemed loan to a deemed dividend.
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... is a concern because, where for example a local party undercharges a foreign connected party for goods or services, or where the foreign connected party overcharges the local party, the parties to the transaction can effectively manipulate their income and taxable profits can be shifted from South Africa to other jurisdictions.
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, No 58 of 1962 (Act) contains South Africa’s 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. Essentially, where connected persons enter into international transactions on terms that are not arm’s length, s31 of the Act allows SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... to disregard any such manipulations and tax the parties as if they were transacting on an arm’s length basis. This is referred to as the primary adjustment mechanism.
Section 31 of the Act also provides for a secondary adjustment mechanism. Where for example a local party has undercharged a connected foreign party, or the foreign party has overcharged the local party, the actual amounts paid are not affected despite the primary adjustment.
In order to get parties to actually pay arm’s length amounts, the difference in pricing is deemed to be a loan outstanding between the parties, on which arm’s length interest accrues, which interest is taxable.
In the explanatory memorandum to the Bill, SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... states that the deemed loan mechanism is problematic because in practice it is simply never repaid. The reason for this is that:
• there are no contracts setting out the repayment terms because it is a deemed loan and not an actual loan; and
• there may be exchange control restrictions that prevent the repayment of a deemed loan.
It is proposed in the Bill that the relevant amount not be deemed to be a loan, but rather a dividend in specie paid by the local party, on which dividends tax would, in principle, be payable. The effective date would be January 1, 2015.
At a recent workshop hosted by National Treasury and SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... on the Bill, stakeholders voiced various concerns in respect of this proposal. Some of the comments included that:
• the Bill does not take into account situations where the relationship between the parties is that of shareholder and subsidiary and the provision deems an amount to be a dividend paid by the shareholder to its subsidiary — in such circumstances the participation exemption in a relevant tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... might not be available;
• the Bill does not take into account the situation where the local party is a natural person, which cannot as such pay a dividend;
• the Bill does not say when the dividend is deemed to arise;
• the Bill does not say to whom the dividend is deemed to be paid; and
• it is not clear how current deemed loans will be affected and whether the Bill will have retrospective effect.
National Treasury and SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... initially appeared adamant to proceed with the proposed amendment in its current form, but eventually did take note of the concerns raised and indicated that further consultation will be held in respect of this matter.
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