Dividends are considered a potentially affected transaction by SARS

I was reading the “How to complete and submit your country by country information” external guide published by SARS and came across the below.

For the purposes of calculating the value of a taxpayer’s annual aggregate (potentially affected transactions): Continue reading “Dividends are considered a potentially affected transaction by SARS”

CBCr – initial teething problems with country by country reporting

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?

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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).

Transfer pricing documentation now compulsory in South Africa, and more!

The South African Revenue Service (SARS) has finalized the previous discussed draft notice which requires taxpayers to keep certain records, books of account or documents as prescribed in the notice, in terms of section 29 of the Tax Administration Act, 2011. The notice which was gazetted on 28 October 2016 requires certain taxpayers to maintain transfer pricing documentation on an annual basis, and more.

The gazetted notice has not changed from the draft notice except for increased thresholds and an additional section, section 7, which allows for an alternative arrangement with SARS for financial assistance transactions. The increase threshold will elevate some burden for smaller businesses but is still easily met, especially by those firms which mainly deal with cross border related parties (e.g. importers).

The gazetted threshold was increased for potentially affected transactions from an aggregate value of more than R50 million or more than 5% of total gross income and R50 million to more than R100 million (USD 7.45mil). Importantly the aggregate value is determined without offsetting any potential affected transactions against one another and the R100 million is applicable where it is reasonably expected that for the current year of assessment that threshold will be met. Additionally, Paragraph 4 now only relates to potentially affected transactions which exceed, or are reasonably expected to exceed R5 million in value instead of R1 million which was initially stated.

The notice is applicable for years of assessments commencing on or after 1 October 2016.

If you have any questions on how this may affect you, please let me know.

Compulsory transfer pricing documentation requirements in South Africa

…it is quite easy to fall within the new requirements…

The South African Revenue Service (SARS) has released the awaited update to its draft notice in terms of section 29 of the (South African) Tax Administration Act, 2011. I wrote a blog post about the previous draft notice in January 2016, if you need a quick refresher, click here.

leaves-374246_960_720There are important updates and changes in the amended draft notice which arguably means that the amended draft notice is now applicable to more taxpayers. The previous draft notice was only relevant for a taxpayer with a group consolidated South African turnover of R1 billion or more. Without going into detail on the definition of consolidated South African turnover, the R1 billion threshold was seen to be too burdensome on taxpayers that may not have material related party transactions (more on this later). This threshold changed and the amended draft notice’s threshold reads as follows:

“A person must keep the records specified in paragraph 3 and 4 if the person—

  • (a) has entered into a potentially affected transaction; and
  • (b) the aggregate of the person’s potentially affected transactions for the year of assessment exceeds or is reasonably expected to exceed the higher of—
    • (i) 5 per cent of the person’s gross income; or
    • (ii) R50 million.”

As you can see from the above, it is quite easy to fall within the new requirement. For example, where the taxpayer’s revenue is R100 million and more than 5% or R50 million (in this case more than R50 million) of the R100 million is derived from a potentially affected transaction, this taxpayer will have to meet the requirements as per the amended draft notice.

Paragraph 3 and 4 of the amended draft notice provide a list of the information required. Instead of just rewriting the list you can see the list here. Paragraph 3 and 4 were previously in one paragraph in the old draft notice. The reason for breaking this down into two sections is that the amended draft notice is asking for overall information about the taxpayer in paragraph 3 and paragraph 4 is only applicable to potentially affected transactions that exceed or are reasonably expected to exceed R1 million (this seems to be SARS’ definition of material in relation to potentially affected transactions).

document-428331_960_720There are some changes to certain questions in the amended draft notice but overall the questions are still very detailed and require the taxpayer to apply his/her mind when answering the questions. SARS was quite clear during the first workshop discussing the previous draft notice that the final draft notice’s purpose is to create a base of information to be retained that will enable the taxpayer to have all the necessary information in place to be able to form an opinion or analysis on whether the cross border related party transaction (potentially affected transactions) can be supported by the arm’s length principle, as required by section 31 of the (South African) Income Tax Act.

I am sure a lot of the comments are going to be about the new threshold as this will require many more taxpayers to comply with the amended draft notice. SARS did introduce an additional threshold for smaller transactions. Paragraph 4 of the amended draft notice is only applicable to potentially affected transactions with a value of R1 million or more. This may assist some taxpayers, but I am not sure how often that will apply.

file-cabinet-146157_960_720There are a few general thoughts, firstly, South Africa has been very lenient when it comes to compulsory transfer pricing documentation (or other information) retention requirements. Many countries in the world, including African countries like Tanzania, Kenya or Ghana (to name a few) have already got compulsory transfer pricing documentation requirements. So this should not really be seen as punitive but rather South Africa aligning itself to international standards. On the other hand, the thresholds seem rather low and are very likely to increase compliance costs for smaller taxpayers. SARS mentioned during the previous workshop that compliance cost for the larger multinationals compared to small to medium businesses is much lower when using a compliance cost over revenue ratio. My understanding was that the R1 billion threshold previously was chosen as SARS did not want the small to medium business to suffer under greater compliance cost. This seems to be counterintuitive. Having said that, anyone with material cross border related party transactions is required to discharge the onus of being at arm’s length under section 31 of the Income Tax Act, so this just formalising this requirement. As SARS also mentioned during the workshop, a taxpayer should have considered the questions under paragraph 3 and 4 in anycase and as such (again) this is only formalising the approach.

Are you on top of your transfer pricing?

Scores of South African corporate companies will soon be subject to increased scrutiny and cross-border tax reporting regulations as the country aligns its tax regulations with global standards. These latest requirements are contained in two draft notes from the SA Revenue Service (SARS).

The first deals with compulsory transfer pricing documentation retention requirements for companies with revenues over R1 billion and the second introduces the Country-by-Country Reporting (CBCR) Standard for Multinational Enterprises.

The requirement stems from the OECD-led Base Erosion and Profit Shifting (BEPS) project that aims to eliminate tax planning strategies which exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.

The OECD reports that the magnitude of the problem, according to research since 2013, is conservatively estimated at between 4% and 10% of global corporate income tax revenues, worth between US$100 billion and US$240 billion annually.

The concept of eliminating profit shifting through practices such as transfer pricing is not new, but there has been renewed vigour on a global scale to accelerate agreement and compliance. The aim of the CBCR standard, which is the second draft note from SARS mentioned above, is to improve transparency of earnings by multinationals in multiple territories.

Through this measure, countries will be able to gain a more accurate picture of whether tax liabilities in their jurisdiction are being fully met.

The upshot of the new regulations is a far more vigorous reporting requirement on qualifying companies. The regulations call for organisations to submit their first reports as from 31 December 2017 for the fiscal year starting on or after 1 January 2016.

The threshold for companies to complete country-by-country financial reports has been set in South Africa at a turnover above R10 billion, with additional provisions that throw this net a little wider.

These additional provisions apply to South African tax resident companies that are not the ‘ultimate parent entity’ of a multinational group when their parent entity is not obligated to file a report in its tax jurisdiction; when the parent entity does not yet have a tax information sharing agreement with South Africa; or that fails to share information required by the new regulations.  Despite these options, the group must still meet the R10bn first, and then if any of these apply, the SA entity will be legally obligated to report according to the CBCR standards.

The finer details and definitions of what constitutes a parent entity are quite complex, but any large corporate that is a subsidiary of a global group or a South African entity operating in multiple international markets will undoubtedly be affected. What these regulations do make very clear, though, is that many large corporations are going to have to invest considerable time and effort to ensure they comply with the new reporting standards.

Apart from adopting new processes, companies that do not have the ability to consolidate financial statements across multiple entities, particularly cross-border operations, may have to invest in the necessary technology to minimise disruption to their accounting teams.

There is little doubt that hiding or shifting profits is going to become increasingly difficult as this new era of transparency and information sharing takes effect. Ultimately, this is for the good of the local and global economy, and companies are advised to take these measures seriously and start preparing for the first reports in order to avoid disruption or non-compliance.

Is transfer pricing documentation becoming compulsory in South Africa?

One of the first questions that usually come up in relation to local transfer pricing requirements is along the lines of: Is transfer pricing documentation compulsory and if so what should the documentation consist of?

From a South African perspective, many transfer pricing professionals will tell you that the law doesn’t require you to have transfer pricing documentation per se. Rather there is a requirement by the taxpayer, or to put it in other words, the onus is on the taxpayer to discharge her/his onus that cross border related party transactions are  arm’s length. In most instances this will mean that some sort of exercise/study is required and the best way to do this is generally through a transfer pricing document. But again, such document is not legally required. It is a bit of an odd one and has caused some confusion in South Africa. But no more –

Documentation 2As of 15 December 2015, SARS issued a draft notice (Draft Notice) in terms of section 29 of the Tax Administration Act, 2011. The Draft Notice sets out additional record-keeping requirements for “potentially affected transactions” where the taxpayer has a “consolidated South African turnover” of R1 billion (approx. US$64 million) and above. Affected transaction is more or less defined as a cross border related party transaction (including schemes and other arrangements). The Draft Notice contains a schedule which requires that the person (taxpayer) who falls within the definition (i.e. above the R1 billion) must keep and retain certain records, books of accounts or documents as listed in the schedule. If you are below this threshold you are back in the above grey world of where documentation is somewhat required, but at least there is no detailed schedule that the taxpayer must adhere to.

The Draft Notice can be found on SARS’ website and I will not discuss the list further here, but note, it is quite detailed and requires a lot of information. If you have any questions in relation to specific info please let me know. Also be aware that comments in relation to the Draft Notice will have to be submitted to SARS by the 5th of February. If you have any comments you would like me to add to mine, please let me know before then too.

One interesting question that I believe most of the comments are going to be about is the wording around the consolidation: “a member of a group with a consolidated South African turnover of R1 billion and above.” The basis for the consolidation is not really clear. Is it only South African entities and subsidiaries, or does it include some of the turnover of offshore/cross border parent companies as well?