Transfer pricing

Insights

Managing Transfer Pricing Risk

Effective Transfer pricing guidelines still eluding business

Transfer pricing has become a critical issue for African tax administrators who are facing increased levels of inward investment and, South Africa, long-regarded as a natural home for onward investment into the African continent, is in danger of lagging behind other countries in Africa because of the challenges posed by legislative difficulties and uncertainties.

Transfer pricing has become a critical issue for African tax administrators who are facing increased levels of inward investment and, South Africa, long-regarded as a natural home for onward investment into the African continent, is in danger of lagging behind other countries in Africa because of the challenges posed by legislative difficulties and uncertainties.

Multinational companies should be aware of the significant developments within the OECD which will likely impact companies in South Africa, but should also not automatically accept that SARS will adopt the OECD thinking.   SARS has increased its activity and information gathering surrounding transfer pricing. Its requirements regarding the provision of such information are placing onerous demands on multi-national companies.  The OECD new guidance on preparing Transfer Pricing Documentation has provided greater clarity, but the country by country reporting is still creating some issues for multinationals seeking to be compliant.   This coupled with SARS increased disclosure requirements on the tax return is problematic.  Many organisational systems are not necessarily geared to extract the level of segmented information required.  This increased compliance burden is coupled with a degree of uncertainty when looking at the South African environment.   

Most multi-nationals undertaking intra-group transfer pricing within their groups are looking towards more clarity, certainty and consistency when it comes to the actual implementation of the legislation we already have on transfer pricing.  Outdated practice notes coupled with uncertainty of SARS acceptance around comparability analysis continues to place the pressure of uncertainty on multinationals conducting business in South Africa.  What most multi-national corporations would like to see in South Africa is the implementation of Advanced Pricing Agreements (APA’s), so that there is agreement with tax authorities around transfer pricing as well as certainty, at a local and broader level.  Because of not being able to get an APA in place, companies are presently going ahead with their individual approaches to transfer pricing not knowing whether SARS is going to accept them or not.

South Africa’s domestic system for providing taxpayers with rulings – the advance tax ruling system – specifically excludes transfer pricing matters from the types of issue where a ruling is available. So this mechanism is also not available to taxpayers seeking greater certainty.  With no APA program available, the increased incidence of Transfer Pricing audits creates significant difficulties and uncertainty for taxpayers because these often take years to resolve and impact the daily business operations.  This is coupled with a high incidence or double taxation as most cases are resolved using the Settlement process which does not absolve the incidence of double taxation, nor does it give comfort to the acceptance of the policy on an ongoing basis.  In this vital context South Africa is lagging behind countries like Nigeria - who already provide the framework for negotiating APA’s with multinationals - and Kenya, Tanzania as well as Uganda that are likely to implement APAs in the foreseeable future.

In addition to the inability to obtain certainty on broader transfer pricing issues through an APA or ruling, the lack of clear guidance on SARS approach to the deductibility of interest on in-bound financial assistance is also posing significant challenges for inbound investors seeking to expand into South Africa.  The draft Interpretation Note on thin capitalisation issued in 2013 still requires finalisation and there is uncertainty as to whether it will be finalised in its current form.  This is coupled with the lack of consistency between transfer pricing and other parts of the legislation which place specific restrictions on the deductibility of interest payments to non-residents.  As attention is still being paid to the thin capitalisation rules, clarity is required on how the two are going to be linked and what the final legislation will look like.

Another area of uncertainty is in relation to secondary adjustments (which apply where a transfer pricing adjustment is made). Current legislation provides for a deemed loan, which has proven to be very difficult to apply in practice. In the 2014 Budget documentation, it was announced that this would be replaced with some other mechanism, likely a deemed dividend. South African taxpayers are eagerly awaiting details of how this new secondary adjustment mechanism will work.

Finally, whilst the world focuses on Base Erosion and Profit Shifting (BEPS) and the proposed action plan, it would be good to understand whether these actions have real merit in an African and South African context?  Exchange controls, coupled with withholding taxes still provide strong protection to base erosion and perhaps South Africa has more pressing needs to address?

Contacts

Bradley Pearson

Associate Director, Tax, KwaZulu-Natal

+27 (0)31 560 7426

brpearson@deloitte.co.za

 

Karen Miller

Associate Director, Tax, Western Cape

+27 (0)21 427 5484

karmiller@deloitte.co.za

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