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:Continue reading “COVID-19 what to consider from a transfer pricing perspective”
Nigeria has aligned its transfer pricing rules to the recommended approach in the 2017 OECD Guidelines. This includes the CBCR, master file and local file documentation approach as per Chapter V. What I wanted to highlight though is that the Federal Inland Revenue Services (FIRS) has also introduced other changes, including: Continue reading “Nigeria is ready for transfer pricing, are you?”
…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.
There 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).
There 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.
There 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.
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 –
As 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?