Certain recent amendments to the transfer pricing provisions in section 31 of the Income Tax Act No. 58 of 1962 (as amended), sound a note of serious caution for taxpayers entering into cross-border transactions involving parties who have a relationship with each other. Transfer pricing refers to the legal provisions that govern such cross-border transactions. The rationale behind transfer pricing is to ensure that South African residents do not shift their tax liability from South Africa to another country where the tax rates are more favourable.
In short the transfer pricing rules determine that transactions between South African residents and non-residents, who have a relationship with each other, must be conducted at arm’s length. (An arm’s length transaction is defined as a transaction between two related or affiliated parties that is conducted as if they were unrelated so that there is no question of a conflict of interest.) Where such transactions are not conducted at arm’s length the South African Revenue Service (SARS) has the discretion to make an adjustment to ensure that the necessary tax is paid in South Africa as if the transaction had been concluded at arm’s length. This can, for instance, include not giving the South African entity a full deduction where goods were disposed of to a related party in a foreign country at a price that is more than the arm’s length price.
The most notable amendment to the transfer pricing provisions, which came into effect on 1st of April 2012, is that the onus now falls on taxpayers (and not SARS) to make adjustments in their tax returns where the relation-ship is not arm’s length. This means that taxpayers should decide for each transaction whether it is an arm’s length transaction or not and, based on this conclusion, make the necessary adjustments in their tax calculation. The implication is that parties will have to prove that all principles, terms and conditions of the relationship are arm’s length in nature and satisfy SARS that both parties’ daily business activities are consistent with the information presented in their annual tax return. Failure to comply with these provisions could lead to penalties and interest being charged.
This is why a transfer pricing policy document is a valuable tool, although it is not a legal requirement for taxpayers to have such a document. SARS requires certain obligations to be met in this regard:
1. Taxpayers must disclose in their income tax return whether they have such a document.
2. If the taxpayer claims to have such a document then this must be submitted together with the tax return.
3. Whilst the policy document need not be re-submitted every year the taxpayer is required to keep it up to date and to submit any such updates.
The absence of a transfer pricing policy document, together with SARS’s increasing focus on transfer pricing audits, increases the likelihood of an audit being conducted. Such an audit disrupts the taxpayer’s business and gives SARS the opportunity to scrutinise all other taxes as well (i.e. normal income tax, employees’ tax, VAT etc.).
Taxpayers should do everything possible to prevent this happening. Avoid a transfer pricing audit by getting proper documentation in place.
For advice on the compilation of a transfer pricing policy document and related matters, do not hesitate to contact Boet Lubbe on 021 840 1600 or at email@example.com.