Transfer Pricing and Budget 2012
By Billy Joubert, Director and Head of Transfer Pricing, Deloitte Tax
Johannesburg, 24 January 2012 - We have certain fundamental new changes to our TP rules which become effective from 1 April this year. Some of these are quite well known to us by now as we have had a reasonably long time to digest them. These include the fact that the SARS discretion to make TP adjustments is being abolished and the onus is now on taxpayers to make such adjustments themselves. This change places a significantly greater onus on taxpayers.
However, there was an additional sting in the tail of the final version of the 2011 legislation amending the Income Tax Act. This is the new section 31(3), which introduces a deemed loan in respect of TP adjustments.
This means that the potential liabilities associated with transfer pricing exposures may significantly increase. More specifically:
- If a TP adjustment is required at year-end and the taxpayer makes such adjustment, this may avoid the incurral of any penalties or interest.
- However, such adjustment will give rise to a deemed loan. This means that the taxpayer will be liable for tax on arms’ length interest on the deemed loan indefinitely until and unless physical payment is received of the adjusted amount.
- Therefore, if the adjustment related to a non-arms’ length (insufficient) amount charged to a foreign related party, the SA taxpayer must actually charge the other party the difference (and receive payment).
- Conversely, if the adjustment relates to a non-arm’s length (excessive) amount charged by a foreign related party, that other party must actually repay that amount in order for the deemed loan to be eliminated.
This means effectively that taxpayers may be carrying forward indefinitely the consequences of historic TP adjustments. This will prove to be inconvenient and expensive.
Of course, the potential costs of undetected TP exposures become even greater. These costs would include:
- Underpayment of income tax for the relevant financial year
- Penalties and interest- calculated from the end of the financial year concerned - associated with such underpayment
- Income tax on interest for each successive year as a result of the deemed loan
We are also awaiting a new SARS Practice Note dealing with inbound intra-group financial assistance. Indications are that the new practice note will in effect provide that an SA company receiving such inbound financial assistance will only qualify for a tax deduction if it can be shown that an arm’s length lender would have been willing to lend it the money. This test replaces the current mechanical 3:1 debt to equity ratio. The new test is significantly more difficult to apply in practice and probably also more difficult to comply with.
Against this background, we will be watching to see whether there is likely to be any change of heart in relation to the 10% withholding tax on interest – due to be introduced from 1 January 2013. This form of tax seems thoroughly unfriendly to potential investors. Given how much more difficult it may be for SA companies to claim interest deductions in respect of intra-group financing, the withholding tax on interest seems harsh – with significant potential for double taxation within groups.
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