Shazia Raviduth and I wrote the below article based on our comments which we submitted to SARS. What are your thoughts on this Interpretation Note?
On 11 February 2022, the South African Revenue Service (SARS) released a new Draft Interpretation Note (Draft IN) on Intra-Group Financial Transactions for public comment. This Draft IN was welcomed by the South African transfer pricing community, including BDO, as intra-group financial arrangements have been a contentious issue for a number of years. The release of the Draft IN also reinforces that this is an area which SARS will actively be placing under scrutiny. Intra-group financing arrangements have been known to create opportunities for base erosion and profit shifting (BEPS).
I wrote an article on the IBOR transition from a South African perspective about a year ago. The article focused on what “IBOR transition” means and on how to get ready for it should you have active arrangements referencing IBOR. You can find the article here.
From earlier this year some IBOR rates are no longer published. The big example is USD LIBOR, which many have referenced to provide for an interest rate in their agreements. Let’s assume we still have agreements in place as of right now that reference USD LIBOR but as this is no longer published, how do I determine my interest rate. This also assumes the agreement does not have another rate to use in case USD LIBOR is no longer available. The below are some points to consider from a transfer pricing perspective. There are potential other tax consequences that may also arise from this but I have tried to stay clear of those, as it can be a lot to digest in one blog post.
Currently, one of my top blog posts is IQR – Exclusive or Inclusive, that is the question. During my hiatus I did not respond to the comments raised in the post (sorry) but because there were a few, I am sure many others also struggle with this concept. So I wanted to unpack this a bit further and also raise some more awareness around IQRs for transfer pricing purposes. What makes the IQR so interesting from a transfer pricing perspective is that not every tax authority applies the calculation of an IQR consistently.
This brings about some technical questions, for example, if one tax authority accepts an IQR that calculates a higher arm’s length range to another that does not, when using exactly the same data, what should I do? How will the tax authorities interpret this and what can a taxpayer do? I won’t go into further detail here, but let me know if this is something I should unpack in another post or touch base with me directly.
Let’s get back to the topic at hand and with that explain in more detail how to calculate the IQR Inclusive and IQR Exclusive ranges with an example. Thereafter I also managed to find some data from a secondary reference source on how other tax authorities determine the IQR in their jurisdiction. I am not certain if this is indeed correct as I was not able to find a primary reference source, so I won’t mention the jurisdictions but rather just provide the way the tax authority supposedly calculates the IQR. That is also why it is always important to double check your transfer pricing with a local specialist!
Similar to most transfer pricing enthusiasts, I was looking forward to the 2022 OECD Guidelines which were published in January this year. Honestly, I am not sure what I was expecting, it’s not like a new method was on the horizon or that there was going to be a substantial change to the arm’s length principle, but one can always hope for some excitement?
It was not to be, and that is probably a good thing, could you imagine transfer pricing professionals trying to deal with another shock on top of Pillar 1 or 2? But back to the topic, what has actually changed?
Brandon Oaker and I wrote the following article which was published in Business Day late last year and I wanted to post it here as well with a few updates.
As the G20 and most inclusive framework countries back a two-pillar global tax reform to address tax challenges that have arisen from the globalisation and digitisation of the global economy, Africa needs to campaign for more equitable tax allocation to ensure it is not left behind once again.
When gross domestic product (GDP) was first postulated in the first half of the last century, it measured physical goods and services within a brick-and-mortar environment to represent a country’s economic contribution to the global economy. But in a world where assets and services aren’t just physical but digital, intangible, fluid and often volatile, a century-old tax regulation is no longer fit for purpose and needs an overhaul.
In the South African Budget 2020 speech, the Minister of Finance announced that government would be restructuring the corporate income tax system by broadening the tax base in order to potentially reduce the rate in future.
September 2017, the Council of Ministers approved the Mozambican transfer
pricing legislation, which was published in the Official Gazette on 6 December
2017. The provisions of the transfer pricing legislation thereafter came into
effect from 1 January 2018. These provisions were enacted into law to ensure
that taxpayers transact on arm’s length terms and conditions with related parties,
as they would with independent parties. Where a related party transaction is
not arm’s length, the tax authority in Mozambique (MTA) could adjust the
taxable profit of the taxpayer, as if the transaction was in fact arm’s length.
Effective 1 July 2017, Malawi introduced two transfer pricing
(TP) related regulations. Firstly, the Taxation (Transfer Pricing
Documentation) Regulation which deals with transfer pricing documentation
requirements and secondly the Taxation (Transfer Pricing) Regulation which
covers general aspects of TP such as approved methods, key terms, guidance on
intangible property, general application and how to test related party
A key talking point in the recent amendments to the Income Tax Act of Botswana, promulgated in December 2018, was the introduction of transfer pricing rules that took effect 1 July 2019. The introduction of transfer pricing requires taxpayers to transact at arm’s length with any connected person, local or foreign. However, the local transactions are limited to those involving an International Financial Services Centre company. This differs from most other jurisdictions where the transfer pricing rules only apply to cross border related party transactions.
Taxpayers also need to
prepare and potentially submit relevant transfer pricing documentation to
support the arm’s length nature of the transactions. The documentation
requirements, as recommended by the OECD, should include detailed information
about the transactions entered into, the related entities, the nature and
summary of company activities as well as any agreements and an overall group
transfer pricing policy. When submitting the documentation, the regulations require
a taxpayer to submit a local file together with the tax return and a master
file will have to be submitted if transactions with connected persons are more
than BWP5 million. Should a transaction between connected persons not take
place at arm’s length the Commissioner General is authorised to adjust the
taxable income so that it is consistent with the arm’s length principle.
The South African Draft Taxation Laws Amendment Bill (TLAB) has been released for comment. It has been a while since we’ve seen a material change to the transfer pricing regulations. The current inclusion of the “associated enterprise” definition into the transfer pricing regulations is welcomed as it aligns South African legislation to global standards.
The draft TLAB has not removed the connected person concept within section 31 but added the associated enterprise definition to the affected transaction definition. Therefore, a transaction, operation, scheme, agreement or understanding still has to fall within the four provided scenarios under section 31(1)(a), but now the persons in relation to the affected transaction can either be a connected person or an associated enterprise.