The South African submission requirements for a master file and local file have been finalised. The only change to the previous draft submission requirement is the effective date, which is now set as financial years starting on or after 1 October 2016 (instead of 1 January 2016). The master file and South African local file will have to be submitted to SARS 12 months after financial year end, meaning the first reports (files) are due to be submitted on 30 September 2018.
The overall threshold for master file and local file requirements stayed at R100 million. Please keep in mind the R100 million is the gross amount of all cross border related party inbound and outbound transactions added together and includes capital loan balances. In addition, there are also separate transfer pricing documentation retention requirements which should be considered together with the master file and local file requirements.
It may seem that there is still ample time to meet such deadlines, but a master file and local file project (and potentially additional info as per the transfer pricing documentation retention requirements) is time consuming. We recommend to start planning for such a project as soon as possible, especially, where no transfer pricing policy or previous transfer pricing report (file) is in place and this may be the first time you are undertaking such an exercise.
The final South African regulations for country-by-country (CbC) reporting were gazetted on 23 December 2016. With the release of the final regulations, South African multinational group companies are now obliged to report certain information in line with the Base Erosion and Profit Shifting (BEPS) project, directed by the Organization for Economic Co-operation and Development (OECD).
The final regulations have not changed from the previous draft and are in line with the OECD BEPS Action 13. The first reporting period is to commence for fiscal years starting on or after 1 January 2016 (reporting fiscal year). This means that the first CbC reports will be required to be filed with SARS from 31 December 2017.
South African taxpayers that are not the reporting entity (which is generally the top company that has an obligation to submit a CbC report in a multinational group) are referred to as a constituent entity and will have to notify SARS of the reporting entity 12 months after the last day of the reporting fiscal year.
The consolidated group revenue threshold (which is either R10 billion for South African held group companies or 750 million Euro for foreign group companies) which require certain taxpayers to submit a CbC report or notify SARS have not changed.
If you have any questions, please let me know below or contact me.
I was invited to join a panel discussion at the TP Summit to discuss initial teething problems around country-by-country reporting. During the panel we discussed specific topics and I thought I summarise the points below. By no means is the list complete, but I tried to share the most interesting points. What are your thoughts?
How to approach timing differences in relation to implementation of CBCr between different tax jurisdictions where the reporting entity is not yet required to report? To state the problem differently, what if the reporting entity situated in Country A, only has to report for its 2017 year of assessment but a constituent entity (A constituent entity is just an entity/PE part of the MNE that has to report) in Country B will already have to report for its 2016 year of assessment. Could the reporting entity in Country A report its CBCr on a voluntary basis for 2016 which covers the constituent entity, or would that cause other issues, for example is everything in place to share the CBCr between the tax authorities. It is very unlikely that the tax authority in Country B would allow the constituent entity to delay (or not submit) its 2016 CBCr. That really only leaves one practical solution, the constituent entity would have to become a surrogate entity and therefore become the reporting entity for 2016. Practically that means, the surrogate entity would submit the data instead of the ‘previous’ reporting entity in Country A. This is then likely to change in 2017.
What is a surrogate entity? The concept is quite easy, if a tax authority cannot get the CBCr from the ultimate parent as the reporting entity, another entity will stand in as the reporting entity, also know as the surrogate entity. There are some practical challenges, for example, the surrogate entity should report on the whole MNE, including above (i.e. the ultimate parent). But some local laws, for example the UK, may not require a surrogate entity to report on entities above, which could mean that the CBCr from the surrogate entity does not meet the requirements set by other countries. To put this differently, a surrogate entity submitting the CBCr as per the UK laws may not be sufficient in other jurisdictions, which could mean another surrogate entity will have to be elected.
What is the issue with notifications for CBCr? Constituent entities will have to notify their respective tax authorities on which entity in the group is the reporting/surrogate entity. The timing for the notifications differ from country to country. Most are implementing a notification period of 12 months after the year of assessment, however, some countries already require notification by calendar year-end 2016. Another point to consider is how will a taxpayer notify the tax authorities, this could be done via the tax return or an online database. Sometimes tax authorities are slow and that could mean a taxpayer would have to actually submit a written letter to the tax authorities, notifying them of who the reporting/surrogate entity is. Some countries have implemented specific notification penalties, where the taxpayer fails to notify the tax authorities accordingly. Other countries are likely to just use compliance penalty provisions where applicable.
What is meant by ‘related party’ in a CBCr context? The issue here is really around what constitutes a related party and related party revenue. There are different definitions but in the end it is likely that the definition in local law will take precedence. A taxpayer should consider these local requirements to determine firstly, if revenue disclosed is from a related or third-party, but also if there are additional constituent entities to be aware of.
Where should the relevant data be selected from? The OECD has provided some data sources that should be considered, importantly the OECD acknowledges that the data in the CBCr is unlikely to reconcile to the consolidated data. Even with set offs and other consolidation exercises it is going to be very messy to try to reconcile the data back from the report to the consolidated statements. Another issue identified was that of exchange rates. The CBCr should be disclosed in the currency of the reporting entity at the average exchange rate for the year. Should that rate vary considerably from year to year it will result in changing ratios that the tax authorities may run. For example, profits over employees. If the exchange rate decrease (i.e. the currency is worth less in relation to the reporting rate) it looks like less money is being made by a constituent entity even if the employees remain the same and even if profits increase in local currencies.
Lastly there was a discussion around what information should be disclosed in table 3 of the CBCr, for example, the exchange rate data should be shown in table 3 to make the tax authorities aware of the potential issue (among others).