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28 February 2014
Global Tax Alert
News from Transfer Pricing
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South Africa aligns secondary
transfer pricing adjustment
with international standards
Section 31 previously authorized the South African Revenue Service (SARS) to
adjust the consideration for goods or services to an arm’s length price for the
purposes of computing the South African taxable income of a taxpayer.
For years of assessment commencing on or after 1 April 2012, the legislation
changed, allowing the tax authority to consider whether any term or condition
imposed as part of any transaction, operation, scheme, agreement or arrangement
differed from the terms and conditions that would have been agreed if the parties
to the transaction were independent. Any difference in price between what was
charged between the connected persons and what would have been charged
between independent parties needs to be adjusted for in the tax return of the
taxpayer. This is often referred to as the primary adjustment.
To the extent that the taxpayer has not recovered the difference between the arm’s
length charge and the actual charge from the foreign related party, a deemed loan
will arise. This is often referred to as the secondary adjustment. Deemed interest will
accrue on the deemed loan.
The same principles apply for financial assistance/thin capitalization.
It is proposed in the 2014/15 Budget Review that the deemed loan treatment will
be removed, and the deemed dividend treatment will be re-instated for transactions
between a South African subsidiary and a foreign parent company, which most
taxpayers will be familiar with. In case of an adjustment between a South African
parent company and its foreign subsidiary the secondary adjustment will be a capital
contribution.
The deemed dividend treatment
on transfer pricing adjustments of
remuneration for goods or services
will presumably trigger dividends
tax at 15% (similar to the previous
section 31 provisions that triggered
a deemed dividend subject to
secondary tax on companies).
The position is less clear in
relation to interest incurred on
intercompany loans.
In theory, no dividends tax should
be triggered on the non-arm’s
length portion of the interest
provided it is already paid and was
subject to 15% interest withholding
tax effective as of 1 January 2015.
Nonresident lenders will further
not be able to rely on potential
protection available under a double
tax agreement as such protection
typically only applies to the arm’s
length portion of the interest.
However, if the legislature intends a
consistent treatment of all transfer
pricing adjustments as dividends
being subject to dividends tax of
15%, an immediate cash outflow will
be triggered for the South African
payor. In this case, the legislature
should ensure that the non-arm’s
length portion of the interest is
not subject to interest withholding
tax when the interest is paid to the
lender to avoid a double taxation
with withholding tax.
The 2014/15 Budget Speech
is silent on the much needed
amendments required in terms of
the stand-alone thin capitalization
provisions of section 23M of the
Income Tax Act. One can only trust
that the amendments will be taken
into account when the 2014 tax
amendments are drafted.
The classification of the transfer
pricing adjustment as dividends or
capital contribution respectively is
aligned with the recommendation
provided by the European Joint
Transfer Pricing Forum.1 The
concept of a dividend is well
known in the South African law;
however a capital contribution is
typically limited to trusts. It will be
interesting to see how the concept
of capital contributions in relation
to transfer pricing adjustments will
play out in practice.
Endnote
1. EUROPEAN COMMISSION, 18 January 2013, DOC: JTPF/017/FINAL/2012/EN, EU JOINT TRANSFER
PRICING FORUM, Final Report on Secondary Adjustments, Meeting of 25 October 2012.
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Global Tax Alert Transfer pricing
For additional information with respect to this Alert, please contact the following:
Ernst & Young Advisory Services Ltd, Johannesburg, South Africa
• Cornelia Wolff +27 11 772 3157 [email protected]
• Ide Louw +27 11 502 0438 [email protected]
EY Transfer Pricing
• Global Transfer Pricing, Germany
Thomas Borstell, +49 211 9352 10601
• Japan, Tokyo
Kai Hielscher, +81 3 3506 1356
• Americas, United States
Purvez Captain, +1 713 750 8341
• Global Markets, United Kingdom
John Hobster, +44 207 951 6438
• EMEIA, Germany
Oliver Wehnert, +49 211 9352 10627
• TESCM, Amsterdam
Victor Bartels, +31 88 4071378
• Asia Pacific, Singapore
Luis Coronado, +65 6309 8826
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Global Tax Alert Transfer pricing
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