Draft Interpretation Note on Intra-group Financial Arrangements

Shazia Raviduth and I wrote the below article based on our comments which we submitted to SARS. What are your thoughts on this Interpretation Note?

On 11 February 2022, the South African Revenue Service (SARS) released a new Draft Interpretation Note (Draft IN) on Intra-Group Financial Transactions for public comment. This Draft IN was welcomed by the South African transfer pricing community, including BDO, as intra-group financial arrangements have been a contentious issue for a number of years. The release of the Draft IN also reinforces that this is an area which SARS will actively be placing under scrutiny. Intra-group financing arrangements have been known to create opportunities for base erosion and profit shifting (BEPS).

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Update on IBOR transition and transfer pricing

I wrote an article on the IBOR transition from a South African perspective about a year ago. The article focused on what “IBOR transition” means and on how to get ready for it should you have active arrangements referencing IBOR. You can find the article here.

From earlier this year some IBOR rates are no longer published. The big example is USD LIBOR, which many have referenced to provide for an interest rate in their agreements. Let’s assume we still have agreements in place as of right now that reference USD LIBOR but as this is no longer published, how do I determine my interest rate. This also assumes the agreement does not have another rate to use in case USD LIBOR is no longer available. The below are some points to consider from a transfer pricing perspective. There are potential other tax consequences that may also arise from this but I have tried to stay clear of those, as it can be a lot to digest in one blog post.

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Interquartile range for transfer pricing, clear as mud!

Currently, one of my top blog posts is IQR – Exclusive or Inclusive, that is the question. During my hiatus I did not respond to the comments raised in the post (sorry) but because there were a few, I am sure many others also struggle with this concept. So I wanted to unpack this a bit further and also raise some more awareness around IQRs for transfer pricing purposes. What makes the IQR so interesting from a transfer pricing perspective is that not every tax authority applies the calculation of an IQR consistently.

This brings about some technical questions, for example, if one tax authority accepts an IQR that calculates a higher arm’s length range to another that does not, when using exactly the same data, what should I do? How will the tax authorities interpret this and what can a taxpayer do? I won’t go into further detail here, but let me know if this is something I should unpack in another post or touch base with me directly.

Let’s get back to the topic at hand and with that explain in more detail how to calculate the IQR Inclusive and IQR Exclusive ranges with an example. Thereafter I also managed to find some data from a secondary reference source on how other tax authorities determine the IQR in their jurisdiction. I am not certain if this is indeed correct as I was not able to find a primary reference source, so I won’t mention the jurisdictions but rather just provide the way the tax authority supposedly calculates the IQR. That is also why it is always important to double check your transfer pricing with a local specialist!

Ok here it goes.

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The new OECD Guidelines, but maybe not so new after all?

Similar to most transfer pricing enthusiasts, I was looking forward to the 2022 OECD Guidelines which were published in January this year. Honestly, I am not sure what I was expecting, it’s not like a new method was on the horizon or that there was going to be a substantial change to the arm’s length principle, but one can always hope for some excitement?

It was not to be, and that is probably a good thing, could you imagine transfer pricing professionals trying to deal with another shock on top of Pillar 1 or 2? But back to the topic, what has actually changed?

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What taxing the global digital economy means for Africa?

Brandon Oaker and I wrote the following article which was published in Business Day late last year and I wanted to post it here as well with a few updates.

As the G20 and most inclusive framework countries back a two-pillar global tax reform to address tax challenges that have arisen from the globalisation and digitisation of the global economy, Africa needs to campaign for more equitable tax allocation to ensure it is not left behind once again.

When gross domestic product (GDP) was first postulated in the first half of the last century, it measured physical goods and services within a brick-and-mortar environment to represent a country’s economic contribution to the global economy. But in a world where assets and services aren’t just physical but digital, intangible, fluid and often volatile, a century-old tax regulation is no longer fit for purpose and needs an overhaul.

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COVID-19 what to consider from a transfer pricing perspective

Businesses are struggling to survive during the COVID-19 global pandemic and are considering many different options, especially around cash management. Transfer pricing should not be overlooked, and this is not only for compliance reasons. Transfer pricing can assist with alleviating some of the pressures that businesses are currently dealing with. Below is a summary of transfer pricing matters that should be on every multinationals (MNEs’) radar:

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Risk vs return and the effects of COVID-19

Craig Kirsten and I touch on Risk vs Return from a transfer pricing perspective during COVID-19. Please let us know your thoughts on the below in the comment section.

As COVID-19 wreaks havoc across the globe, a topic that is unlikely to have surfaced on the first page of a multinational entity (MNE) group’s red flag report is transfer pricing. That said, it will be the MNE groups who identify, confront, and mitigate material risks, including transfer pricing, that will navigate through the COVID-19 storm.

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What does the new financial transactions guidance provided by the OECD mean for you?

What is it all about?

More than 18 months after the publication of its non-consensus discussion draft on Financial Transactions (BEPS Actions 8 to 10), the OECD released its ‘final’ report on the transfer pricing of financial transactions on Tuesday 11 February 2020. The original draft left some 25 areas of disagreement, representing a non-consensus position of the OECD’s Committee on Fiscal Affairs. While those areas are largely resolved by the guidance, there remain some issues that have not been definitively addressed.

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South African transfer pricing regulations amended to amass taxpayers

The South African Draft Taxation Laws Amendment Bill (TLAB) has been released for comment. It has been a while since we’ve seen a material change to the transfer pricing regulations. The current inclusion of the “associated enterprise” definition into the transfer pricing regulations is welcomed as it aligns South African legislation to global standards.

The draft TLAB has not removed the connected person concept within section 31 but added the associated enterprise definition to the affected transaction definition. Therefore, a transaction, operation, scheme, agreement or understanding still has to fall within the four provided scenarios under section 31(1)(a), but now the persons in relation to the affected transaction can either be a connected person or an associated enterprise.

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IQR – Exclusive or Inclusive, that is the question

I have spoken a lot about the arm’s length range and when we should use a statistical tool such as the interquartile range (IQR) to derive an arm’s length range. But how do we calculate the IQR practically?

The easy answer is, Microsoft Excel or Numbers (for Mac) will do it for you, you just have to use the right formula. For Numbers this is a little easier as there is only one formula (=quartile) but for Excel users this can become a little more confusing as there are two formulas. Originally, Excel also only had one formula but now you have the option of either using =quartile.inc or =quartile.exc. The previous formula within Excel was equivalent to =quartile.inc, in case you were wondering.

So the questions are: Which formula should I use? Does it make a difference in the range? Will the tax authorities care?

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