Substantial changes to transfer pricing rules
by Bradley Pearson and Daveena Naicker
AMENDMENTS to the transfer pricing rules governing cross-border related party transactions will significantly impact on business relationships by placing greater accountability on taxpayers and carrying far-reaching implications for non-compliance.
Effective April 1, the revised rules shift the focus from the arm’s length pricing of related party transactions to include all aspects of the economic relationship between them. Parties will have to prove all principles, terms and conditions of the relationship are arm’s length in nature and satisfy the South African Revenue Services (SARS) that both parties’ daily business activities are consistent with the information presented in their annual tax return.
Key for business is the change that gave SARS the discretion to make transfer pricing adjustments. The onus now falls on the taxpayer to make those adjustments on their tax returns where the relationship is not arm’s length. Failure to comply could lead to penalties or interest that was previously unlikely to have been successfully imposed.
Adjustments will now automatically result in a deemed loan by the taxpayer, who must then account for interest at an arm’s length interest rate. This interest will have to be accounted for indefinitely unless the taxpayer charges or recovers the non-arms’ length amount from the foreign party.
Non-compliance costs thus include underpaying income tax; the resultant penalties and interest and income tax on interest for each subsequent year because of the deemed loan. Currently taxpayers must disclose whether they have a transfer pricing policy document in their income tax return.
The absence of documentation, together with SARS increasing focus on transfer pricing audits, boosts the likelihood of an audit when viewed in conjunction with significant cross-border transactions.
The continued focus on transfer pricing means the potential cost of non-compliance becomes far greater.