New Transfer pricing rules starting to bite, says Deloitte.
Johannesburg, 17 January 2013 - Revised wording in the Income Tax Act has moved the focus on transfer pricing and the classification of cross border, ‘arms-length’ transactions, a change that that has major implications for taxpayers, says Deloitte.
Says Billy Joubert, Director and Head of Transfer Pricing at Deloitte, two key changes in South Africa’s transfer pricing regulations will impact on taxpayers.
“Firstly, the application of the arm’s-length principle has changed. In the past, the legislation focused on the pricing of cross-border transactions between related parties and stipulated that, if arm’s-length pricing is not used, SARS may substitute what it considers to be an arm’s-length price.”
“Under the revised wording the focus will no longer be only on the pricing of transactions, but rather on all aspects of the relationship between contracting parties.”
“Although the arm’s-length principle will continue to apply, SARS has indicated that it intends to look more widely at all aspects of the intra-group relationship to identify, and address if necessary, any aspects which are not arm’s-length,” says Joubert.
“The second key change relates to the triggering of transfer pricing adjustments and the consequences for a South African taxpayer entity of such an adjustment,” he adds.
“The new rules significantly affect both the timing and the determination of the quantum of any such adjustment. In terms of the new rules any transfer pricing adjustments will have to be made by the taxpayer that is party to the affected transaction in the tax return.”
“This differs from the previous rules, which did not allow for a transfer pricing adjustment to be made by the taxpayer itself, but rather provided SARS with the discretion to make such an adjustment, if SARS was of the opinion that the transaction had not been priced on an arm’s-length basis.”
“The onus to make any transfer pricing adjustment therefore shifts from SARS to the taxpayer, placing a considerably greater onus on taxpayers, whilst not diminishing the powers of SARS.”
”This obliges tax payers, at year-end, to make any transfer pricing adjustments that may be necessary. In addition, the obligation to make a transfer pricing adjustment is automatically triggered if the intra-group cross-border transaction contains one or more terms or conditions that are different to that which would have existed under an arm’s-length relationship and which results in a tax benefit being derived by a South African contracting party.”
“The new transfer pricing rules indicate that, to the extent that there is a difference between the arm’s- length price and the price actually charged, the amount of that difference will constitute a deemed loan for the purposes of section 31 of the Income Tax Act. An arm’s-length interest must be applied to the amount of the deemed loan.”
The deemed interest will accrue to the taxpayer for each year of assessment until the deemed loan is repaid, says Joubert.
“The practical implications of this change are quite daunting and there have been informal indications from SARS that the deemed loan may be abolished.”
“A possible, practical alternative would be a deemed dividend – with a consequent liability for dividends tax for the South African entity. Such a mechanism would be similar in practice to the previous rule which imposed STC on transfer pricing adjustments,” concludes Joubert.