Hi there! A quick introduction before we get to business, my name is Shazia and I am the latest addition to the Transfer Pricing team at Grant Thornton. About 10 months back I saw the light and decided to join the TP community and I have not looked back since. Prior to joining Grant Thornton, I was at EY for 3 years where I successfully completed the tax trainee programme. This is my first stab at writing a post for a blog and I am glad to have you walk this journey with me… so here goes…
Because almost every topic in transfer pricing is described as a “hot” topic I thought we could chat through adjustments, deemed dividends and the proposed changes to the South African tax laws (the Act) that could be rolled out in the near future.
According to the Act a dividend is defined as any amount that is transferred or applied by a SA resident company that is for the benefit or on behalf of any person in respect of any share in that company, but specifically excludes a reduction in contributed tax capital and a share repurchase.
This definition is relevant to transfer pricing because all affected transactions i.e. transactions entered into between related parties (please note that this is applicable to companies and not individuals or trusts) which are not carried out according to the arm’s length principle are subject to a primary and secondary adjustment, with the latter considered to be a deemed dividend in specie declared and paid by the SA resident company.
A question that frequently arises is whether the SA resident company would qualify for treaty relief or for the exemption from Dividends Withholding Tax on the deemed dividend? My view is no, a view which seems to be shared by SARS. This makes logical sense as the secondary adjustment aka the deemed dividend in specie represents the extraction of profits out of SA and is considered to be somewhat of a punishment for non-compliance and any relief available would be seen as defeating the purpose of TP exercises, a view shared by the Davis Tax Committee.
Another interesting point of discussion is whether or not the deemed dividend in specie would fall foul of the definition of a dividend as defined in the Act. As I indicated in the beginning of the post, the distribution would have to be made for the benefit of a person in order for the definition to be satisfied. I think that this requirement would not be fulfilled because there is no benefit attached to this secondary adjustment and in the unlikely event of a benefit being present, the benefit would not be attached to shares.
So, in closing, according to the proposed changes a deemed dividend in specie is to be excluded from the definition of a dividend of which no relief will be granted.
I really hope that this article was useful and if anyone has any views please share them with us, we would love to hear your thoughts on this!
Have a great day all and I hope to chat with you soon!