Transfer pricing has now become a key area of focus for the South African Revenue Service (SARS), as companies with multinational ties will be expected to submit more detailed documentation of their inter-company transactions.
This according to Charl Hall, Tax Consultant at Mazars, who adds that the new requirements, which aims to stop multinational companies from shifting their pre-tax profits to more tax-friendly jurisdictions, may also have some advantages.
“In South Africa companies are required to disclose relevant transfer pricing information as part of their Corporate Tax Returns and indicate whether sufficient transfer pricing documentation supporting the arm’s length nature of their transactions is available. The onus of proof in this regard is upon the company and if not appropriately determined SARS could affect adjustments resulting in additional taxes and penalties,” he says.
According to Hall, SARS will require companies to submit more detailed transfer pricing documentation substantiating there cross-border related party transactions.. “The aim is to prevent base erosion and profit shifting (BEPS) which is the use of inappropriate tax planning strategies to shift income to low or no tax jurisdictions where no real or economic substance exists.”
Transfer pricing has become a key area of focus for tax authorities around the world, with the Organisation of Economic Co-operation and Development (OECD) publishing its plan to address BEPS. Local tax authorities, including SARS, have since adopted and published their own requirements related to BEPS.
While the new requirements will place businesses under increased scrutiny, and under more pressure to prepare detailed reports, Rita Chung, Partner at the Transfer Pricing division of Mazars USA, states that there are also possible benefits for businesses.
“Transfer pricing is more than just a compliance requirement; it is often used as a planning tool to develop strategies that align with the company’s overall objectives (tax optimisation, cash flow, etc.). For instance, realignment of the supply chain or relocation of certain activities from one taxing jurisdiction to another may result in significant tax savings,” Chung says.
She adds that tax planning associated with the creation and ownership of valuable intellectual property is an often overlooked area that may also create favourable tax results. “For instance, developing an effective manufacturing model in a low cost, low tax jurisdiction, may result in the realisation of certain competitive advantages such as manufacturing know-how.”
According to Chung, this type of intangible property is sometimes not fully appreciated as an important value driver for a manufacturing and distribution business, which should be compensated for in a manner which is commensurate with its economic value. “An arm’s length level of compensation for the development and use of such intangible property may lead to a more tax-efficient distribution of profit within a multinational group,” she continues.
Hall explains that South African companies will need to take note of a number of new requirements this year, if their tax returns are to remain compliant.
Firstly, the South African Tax Administration Act requires that a Master File, which contains high level information of the entire multinational groups operations in a single document available to all tax authorities where the multinational group has operations, and a Local File, which contains information regarding the jurisdictional activities of the multinational entities available to local tax authorities within the jurisdiction, is submitted with corporate tax returns.
Secondly, in the event of a SARS transfer pricing audit additional mandatory transfer pricing documentation has to be kept in terms of the record keeping provisions as set out in the Tax Admin Act and the regulations issued on 28 October 2016. The regulation requires that specific information is kept where the cross-border related party transactions are in excess of R 100 million or reasonably expected to exceed the R 100 million for a transfer pricing audit. “Other transaction specific information should also be kept for cross-border transactions in excess of R 5 million that are included in the R 100 million,” Hall adds.
“Taxpayers should plan ahead and analyse their existing transfer pricing policies to mitigate potential areas of exposure. Furthermore, it is critical to prepare strong transfer pricing documentation to protect the Company against potential transfer pricing adjustments by SARS,” Hall concludes.