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S.Africa: When to expect a transfer pricing interpretation note?

When to expect a transfer pricing interpretation note?

2018/19 South African National Budget Expectations

By Billy Joubert, Deloitte.
South African corporate taxpayers have, over the past few years, been subjected to a barrage of additional transfer pricing compliance requirements.

These have included compulsory documentation requirements, the requirement to submit Country-by-Country (CbC) reports plus onerous additional record keeping requirements. All these changes have been closely aligned to the OECD Transfer Pricing Guidelines.

However, while South Africa follows the OECD Guidelines (which evolve from time to time), our own transfer pricing rules – as contained in SARS Practice Note 7 – have remained unchanged since the practice note was issued in 1999. Since our practice note is based on the OECD Guidelines, and the OECD Guidelines themselves have been significantly updated and supplemented, it stands to reason that the practice note is very out of date by now. It also does not take into account most of the latest South African legislative changes and documentation retention and submission requirements.

SARS also issued its Practice Note 2, which dealt with thin capitalisation, in 1999. (Thin capitalisation refers to companies that are financed through a high level of debt relative to equity.) That practice note has since been withdrawn and a draft interpretation note on thin capitalisation was issued in 2013. However, despite extensive comments having been submitted to SARS on the draft, the interpretation note has never been finalised. There is therefore a lack of definitive guidance from SARS in relation to thin capitalisation – with taxpayers uncertain to what extent the draft interpretation note can be relied on.

A definitive consolidated interpretation note – dealing both with transfer pricing in general and with thin capitalisation in particular – is therefore long overdue. When the Minister of Finance delivers his budget speech, corporate taxpayers and their advisors will be hoping for some guidance regarding the likely timing of the new interpretation note.

Another area of interest for taxpayers is how SARS will use – and cope with – the vast quantities of information which have already started to be submitted to it. The first taxpayers which were required to compulsorily submit documentation would have been affected companies with a December 2017 year-end, so that documentation should already be with SARS. SARS will also soon start receiving CbC reports, mainly from SA based multi-nationals. An extension was granted up to the end of February 2018 for the submission of certain CbC reports and transfer pricing documentation (i.e. master file and local file) which would otherwise have been due by December 2017 or January 2018. This extension was granted because of the fact that the “CbC link” on the SARS eFiling platform – containing the CBC01 Form – was only released by SARS very late in 2017. Therefore SARS is likely to receive many CbC reports and significant transfer pricing documentation from the end of February 2018.

In addition SARS will be obliged to start exchanging such CbC reports with foreign tax authorities from June 2018 – and SARS will be receiving CbC reports from many countries. The practicalities of this process are likely to be challenging.

SARS has lagged behind many other jurisdictions in rulings for corporate taxpayers and engaging in advance pricing agreement (APA) negotiations with other revenue authorities. These mechanisms are important internationally for taxpayers in order to try to avoid costly and lengthy transfer pricing disputes.

Currently SARS is not willing to issue any form of ruling in relation to transfer pricing and has so far been unwilling to commit to an APA programme. This has presumably been due to resource constraints – and the complexity of many transfer pricing matters.

However, in an era of greater disclosure and transparency – both by taxpayers and revenue authorities – SARS’ refusal to engage in rulings and APA’s may no longer be acceptable and may need to be reconsidered.

In addition, there have been a limited number of Mutual Agreement Procedures (MAPs) entered into between SARS and other tax authorities in order to resolve transfer pricing disputes where economic double taxation occurs between the two jurisdictions. Where MAPs have been entered into, these have taken a considerable amount of time to be resolved (also presumably due to resource constraints at SARS). Given that transfer pricing is becoming an area of focus locally and internationally, it is likely that transfer pricing disputes will increase in future and as such, SARS should ensure that it is adequately equipped to deal with such cross border disputes, and that the process followed is in line with international standards.

Transfer pricing therefore remains one of the most complex areas of tax and it is changing rapidly, both internationally and in South Africa. It is therefore important that South Africa’s own transfer pricing rules should evolve accordingly and should not fall any further behind.
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