It was indeed a relief that we had a budget speech as scheduled and without major disruptions. Although not being the main focus point of the post budget media discussions (the increased VAT rate won that prize), there is a strong emphasis in the budget proposals on increased enforcement of rules and regulations governing transfer pricing and cross border transactions, that may result in profit shifting.
As part of this process, it was indicated by the Minister of Finance that the National Treasury, in cooperation with the Reserve Bank, the Financial Intelligence Centre and the South African Revenue Service, would be implementing steps to detect, disrupt and deter illicit financial flows. This would be complemented by measures such as increased enforcement capacity, coordinating a national risk assessment and improving information sharing between various agencies, for which an analysis of the Country-by-Country reports would be the starting point.
Even though the BEPS requirements only apply to certain multinationals, global revenue scrutiny in terms of BEPS transparency could result in a significant boosting of revenue collection, not only in South Africa but also in Africa and the rest of the world.
With the 28 February deadline approaching for the filing of three tier documentation by multinationals with a 31 December year-end and subject to the filing as prescribed, the new filing system and process would be tested. As with all new systems and processes, it may take a while for all the issues to be resolved and for all the involved parties to get used to it. It is to be seen when SARS commences with the process of analysing the three-tier documentation, but given the shortfalls and pressure placed on the fiscus to achieve its targets, it is to be expected that it would not take too long.
We are hopeful that the new transfer pricing interpretation note, replacing the outdated Practice Note 7/1999, would be issued during the course of the year, as well as the final interpretation note on thin capitalisation. This, combined with the filing of three tier documentation, would ensure a lot more certainty for taxpayers in terms of transfer pricing compliance, which should translate in more effective enforcement of the transfer pricing provisions.
It was also specifically mentioned in the budget speech that treasury is investigating options to further curb the practice of excessive interest deductions by companies in order to reduce their tax liability. This has been a focus point of the fiscus for many years.
Notwithstanding the increased scrutiny on cross border transactions, it was at least stated in the budget speech that various reforms are proposed to make it easier for South Africans to diversify and invest into Africa, which is welcomed as part of the drive to encourage the establishment and growth of businesses to create employment and grow the economy. As part of these measures, the offshore allocation limits for institutional investors have been increased by five percentage points across all categories, including the special allocation to African investments, which has been increased to ten percent.