Transfer pricing and the inherent arm’s length principle has been around for some time now and many African countries have implemented transfer pricing regulations. In Africa, only about five countries had transfer pricing legislation in place before 2000, now in 2019, only about five countries do not have any arm’s length or anti-avoidance provisions in place dealing with transfer pricing. Out of these countries approximately 40 countries in Africa have some sort of formal transfer pricing documentation requirements, be it in the form of formal submission or retention requirements.Continue reading “Practical aspects on transfer pricing”
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”
The cat is finally out of the bag. SARS released a public draft notice that requires taxpayers to file their transfer pricing master file and local file with the tax return. The threshold is set at R100mil of total aggregate cross border related party transactions. This is lower than thresholds introduced in Europe but in line with the previous documentation retention requirements, which came into effect 1 October 2016. As always make sure you consider all thresholds throughout the countries you operate in, to make sure you are compliant around the world (same is true for CBCR). Continue reading “Weekly transfer pricing roundup – 05 June 2017”
Our transfer pricing seminars went well last week, both in Kenya and South Africa. Thanks for those of you who attended, it was great catching up. If you missed them, check out my twitter feed for some quick updates.
This week the OECD released a new discussion draft providing guidance on hard-to-value intangibles (HTVI). The approach to HTVI was previously agreed to and is published in the BEPS Action 8-10 final report. You may remember the whole ex post and ex ante discussion. Continue reading “Weekly transfer pricing roundup – 29 May 2017”
The conference overall was very insightful and I am glad I could participate. I hope to be back next year, and maybe see more of you guys there? As promised herewith the juicy bits from day 2. Just to reiterate, these are not necessarily my views, but I find some of the thoughts interesting so I had to share them:
- Tax authorities, including SARS, use analytical tools to determine a risk rating for taxpayers
- SARS would not only go after specific transactions but also after certain industries, including aggressive schemes/structures (marketing hub was mentioned)
- Initially tax authorities like SARS are just trying to understand your business and taxpayers don’t always provide adequate information. Taxpayers should provide correct and detailed responses, which will help the tax authorities with a ‘better’ audit (correct), less back and forth re information requests, and should an audit go to court the initial information will be under scrutiny
- Taxpayers should keep in mind that tax authorities have no ‘real’ understanding of what is going on and are just trying to get this understanding
- When giving additional information, a taxpayer should reference this back to the TP Document and other info where relevant
- SARS automatically will look at historic tax returns, up to 10 years
- If a taxpayer states there is a TP Document available, SARS will only give 7 days to provide said TP Document
- It isn’t certain that SARS will accept the low value adding services section of the BEPS Action Point 8 – 10
- Should a transaction not be at arm’s length as per s31, could that threaten a CFC’s business establishment exemption?
- If you are using IP, do you know what the actual value of it is? This should form part of the new/overall thresholds re TP Documentation requirements or other BEPS thresholds
- The draft thin cap interpretation note does not seem to be relevant and assumptions are made that it will be revisited before it is finalised
- There is an assumption out there that before BEPS everyone was safe, and no you are no longer – not really true, the arm’s length principle has been around before BEPS
- The fact that a taxpayer is transacting from a tax heaven is not the issue, the issue arises where a taxpayer cannot support a transaction from an arm’s length perspective – would a third party transact that way
- The arm’s length principle is not about being ‘fair’ but rather what is market related – is the market fair?
If you have any thoughts or questions, please share them below. And don’t forget to share the posts so other transfer pricing enthusiast can discover my blog too.
African countries dominated the news this week in relation to transfer pricing. The theme throughout the different articles is very similar: there is a lot of information sharing between African countries (and worldwide), additional requirements have been introduced in order to keep in line with OECD requirements (e.g. transfer pricing documentation requirements), and countries are under additional pressure to increase revenue collection without increasing taxes. The last point is likely to result in additional audits and transfer pricing has been identified as an area where tax authorities should increase efforts to ensure correct pricing and believe they can collect additional revenue.
See below a summary of the articles that I found most striking.
The South African Revenue Service (SARS), through its transfer pricing unit, has already upped its audits of multinational companies in recent years, resulting in transfer pricing adjustments running into billions of rand in additional income tax…
This has been in the news by various authors, so I will just replicate the first paragraph.
“New developments in terms of the Tax Administration Act 2011 now require certain entities to keep transfer pricing documentation for submission to the South African Revenue Service (SARS). SARS has now finalised the previously 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 Federal Inland Revenue Service (FIRS) has begun Transfer Pricing audits and has been requesting TP documentation and other documents from taxpayers relating to their related party transactions. These actions are in line with its powers under the Income Tax (Transfer Pricing) Regulations No. 1 of 2012 and Federal Inland Revenue Service Establishment Act… However, the good news is that a taxpayer has, at its disposal, a number of dispute resolution mechanisms under Nigerian law each with its implications…”
“Revenue collection agencies in the five-nation East African Community plan to develop a framework to share intelligence real time.
This is in a bid to combat rising cases of tax evasion through cross-border trade, with technical help from the World Bank.
Commissioners of tax investigations and enforcement from Kenya, Tanzania, Uganda, Rwanda and Burundi on Friday said they are working on a mechanism to share intelligence on possible taxation fraud…”
“Woodhouse said that the Government is considering measures that will make it harder for multinationals to avoid having a taxable presence in New Zealand if they are involved in significant economic activity there. The Government is also looking to release proposals next year to bolster New Zealand’s thin capitalization rules, to ensure that foreign-owned firms cannot shift excessive profits out of New Zealand.
The Government will also take adequate measures in 2017 to neutralize the effects of hybrid mismatches and is closely monitoring the progress made by the UK and Australia in this area. It is also closely watching what Australia and the UK are doing in regards to Diverted Profits Tax. “Officials have provided some advice to the Government and we will look to say more on this in the near future,” he said…”
The article provides a summary on the latest developments within Africa, specifically, it discusses the following:
- ECOWAS: Regional transfer pricing meeting held in Abuja
- Ethiopia: Treaty between Ethiopia and Saudi Arabia enters into force
- Namibia: 2016/17 Mid-year Budget presented to Parliament
- Namibia: Scrapping of tax certificate of good standing certificate requirement
- Liberia: Goods and services tax rate increased
- Malawi: Tax Amendment Laws enacted
- SADC: SADC-EU Trade Treaty comes into effect
- Seychelles: Treaty with Guernsey enters into force
- South Sudan: 2016/17 Draft Budget presented
- ZAMBIA: Electronic payment system rolled launched
“The BEPS project’s new transfer-pricing notion of “cash box” appears to be inconsistent both with commercial reality and with longstanding Canadian outbound international tax policy…”
Formal Document Requests – The IRS’s Tool for Collecting “Foreign-Based Documentation” (National La Review)
“Code Section 982(c)(1) authorizes the IRS to issue an FDR to any taxpayer to request “the production of foreign-based documentation.” An FDR supplements the IRS’s summons authority and its purpose is to discourage taxpayers from delaying or refusing to disclose certain foreign-based documentation to the IRS. Taxpayers should be aware of FDR procedures because failure to respond – either through substantial compliance or some alternative permissible action – within the statutory 90-day response period could result in significant consequences concerning the admissibility of FDR-requested items in future civil proceedings…”
Our preparations to present at the TP Summit are in full swing and include some really interesting topics. If you want to hear more about notification requirements for CBCr (some deadlines are already by December 2016) or what royalties and services have to do with customs and transfer pricing come join me. It is going to be interesting and fun.
But for this post we shall stick to the latest developments which includes South Africa introducing transfer pricing documentation retention requirements and the former federal treasurer (of Australia) accusing BHP of stripping profits into Singapore.
By the way, I have been tracking the stats for the posts and they are always growing, thanks to you. But please don’t forget to share or like the posts if you think they are valuable to share the love.
SARS has finalised 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.
“Former federal treasurer Wayne Swan says the board of mining giant BHP Billiton must explain how the company sought to evade $300 million in Queensland state royalty payments…
The Labor MP has accused BHP of using a Singapore tax shield to smuggle profits out of Australia.
“The evidence against BHP is damning. Over a decade, they have ramped up their Singapore marketing hub to camouflage aggressive transfer pricing,” he said…”
“Accenture Plc, the world’s largest consulting firm, has entered the IRS program for continuous, real-time auditing and expects a decrease in its reserves against possible transfer pricing issues, according to filings with the U.S. Securities and Exchange Commission.
Accenture was one of 10 companies to report significant transfer pricing and international corporate taxation issues during October. An alphabetized list follows…”
The article lists the following companies with excerpts from the filings:
- Accenture Plc
- Bristol-Myers Squibb Co.
- Celestica Inc.
- Edwards Lifesciences Corp.
- Jabil Circuit Inc.
- Microsoft Corp.
- Quaker Chemical Corp.
- Rowan Companies Plc
- Team Inc.
- Visteon Corp.
Nov. 7 — A multinational company based in a jurisdiction that has no tax treaty with Israel must pay Israeli taxes on its Israel-related earnings from international money transfer services, the Israel Tax Authority determined.
The ruling is set to apply to the growing number of financial service firms entering the Israeli market, if they are located in a country not covered by a tax treaty with Israel, a senior Tax Authority official told Bloomberg BNA Nov. 3.
Israeli practitioners said the small number of developed countries without such treaties and other formulas available under transfer pricing regulations will greatly limit its use.
More worrisome, they said, is the Tax Authority’s growing appetite for taxes from international transactions by foreign businesses…”
Nokian Tyres tax dispute proceeds. The Company is now finally in position to appeal to the Administrative Court (Business Wire)
“The Board of Adjustment of the Finnish Tax Administration held the reassessment decision from the Tax Administration unchanged related to additional taxes EUR 62.8 million but decreased the amount of punitive tax increases and interests from EUR 31.3 million to EUR 26.4 million concerning tax years 2007-2010. The decision of the Board of Adjustment was not unanimous…”
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.
…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.
Previous TP disclosure requirements in the ITR14 have been expanded
SARS has introduced further changes and enhancements to its ITR14 return on 18 April 2016. Additional sections, questions, items and certain automatic calculations have been added throughout the ITR14. A full analysis of these changes can be found here, but I wanted to highlight the additional transfer pricing disclosure requirements.
The previous transfer pricing disclosure requirements in the ITR14 have been expanded to request details of the number of tax jurisdictions, countries and value per country in relation to related party income received/accrued or expenditure incurred. Furthermore, the amended ITR14 introduced additional transfer pricing questions to determine if the taxpayer:
- Has made any changes to its transfer pricing policy since the previous reporting period including a change in its classification
- Is transacting with a tax jurisdiction that does not have a tax treaty with South Africa
- Selected a tested party which is not tax resident in South Africa
- On or after 1990, transfer, alienate or disposed of intellectual property to any non-resident connected party or branch of a South African resident
Lastly, the new ITR14 also requests an additional financial ratio.
The new transfer pricing disclosure requirements as of 18 April, incorporating previous and new requirements, will assist SARS greatly in creating risk profiles for taxpayers and send additional information request to those, which are deemed to be higher risk. Please let me know your thoughts, and if you would like to discuss your specific case in a more private environment, please feel free to reach out to me here as well.