South Africa’s transfer pricing legislation came into effect on 1 July 1995 and was followed by Practice Note 2 and Practice Note 7. These provided taxpayers with guidance on how the South African Revenue Service (“SARS”) intended to apply the legislation, including certain guidelines on transfer pricing documentation, which was largely based on the Organisation for Economic Cooperation and Development (“OECD”) transfer pricing documentation guidelines. This remained the only point of reference for taxpayers and transfer pricing service providers until recently.
On 17 July 2013, the Minister of Finance tasked the Davis Tax Committee to make recommendations for possible tax reforms in South Africa. The Davis Committee, in terms of its report, was of the view that the current Practice Note 7 contains unclear documentation guidelines for taxpayers in South Africa and consequently made certain recommendations to revise the transfer pricing documentation guidelines in SA. This included that Practice Note 7 should be revised and updated to be in line with the OECD revised Transfer Pricing Documentation Guidelines. Certain documentation thresholds should be introduced and SARS should balance requests for transfer pricing documentation against the expected cost and administrative burden to the taxpayer of creating it. The report also emphasised that taxpayers choosing not to prepare documentation would be at risk, since it may be more difficult for them to discharge the onus of proving that its cross-border connected-party transactions are conducted at arm’s length.
On 15 December 2015, SARS issued a Draft Notice in terms of section 29 of the Tax Administration Act, 2011, which proposed extensive and comprehensive documentation requirements that must be kept by taxpayers with a consolidated South African turnover of R1 billion or more. The threshold introduced was based on the Davis Committee recommendations.
Some of the information required to be retained in terms of the draft notice include:
- a business operation summary
- for a non-resident tested party, all contracts and invoices with customers and suppliers, as well as segmented financial information per potential affected transaction
- for tested parties, a detailed allocation of revenues, costs, expenses and profits between its connected person transactions and independent person transactions
- detailed information for affected transactions that relate to financial assistance
- a summary of financial forecasts that are contemporaneous with the financial assistance transactions in question, but only as far as is meaningful in relation to the period of the funding transactions, indicating the expected levels of interest cover, gearing or other relevant measures over the forecast period
- any other information, data or document which may be relevant in the determination of an arm’s length return under section 31(2) of the Act, including data relating to a connected person
The Draft Notice also indicated that taxpayers with a South African turnover that does not exceed the R1 billion threshold must retain records to support any cross-border related-party transaction which, in the absence of additional guidance, seems to indicate that such taxpayers should have transfer pricing policy documentation prepared as per the requirement set out by the OECD.
SAICA and other institutions subsequently submitted comments to SARS on the first round Draft Notice document. These comments mainly focused on the increased cost of compliance resulting from the additional documentation requirements, whether certain documentation should be required to be retained or only be accessible at the request of SARS, as well as the introduction of materiality limitations.
Based on the comments received, a second round Draft Notice document was issued by SARS.
In terms of the updated Draft Notice, it appears that the R1 billion threshold has been regarded as too burdensome on taxpayers who may not have material-related party transactions.
This threshold has been changed and the amended Draft Notice’s threshold reads as follows:
“A person must keep the records specified in paragraph 3 and 4 if the person -
- (a) has entered into a potentially affected transaction; and
- (b) the aggregate of the person’s potentially affected transactions for the year of assessment exceeds or is reasonably expected to exceed the higher of:
- (i) 5 percent of the person’s gross income; or
- (ii) R50 million.”
The above amendments have the effect that it will be far more likely for more taxpayers to fall within the new documentation requirements.
A second round of comments have again been submitted by SAICA and other role players. The SAICA comments, submitted on 19 August 2016, focused on the following issues:
- the interaction between the Section 29 regulations and the current Practice Note 7
- the ambit of the compliance obligations of the “potentially affected transactions”
- issues regarding specific information required
- the effective date of the regulations, which was proposed to apply to years of assessment commencing on or after the publication of the final version of the public notice, which would allow taxpayers sufficient time to comply with the new requirements
We are eagerly awaiting the issuing of the final public notice but what is clear is that, going forward, a lot more emphasis would be placed on the nature of transfer pricing documentation, especially for multinationals to a large extent engaging in “potentially affected transactions”. Taxpayers should ensure that they are aware of the more comprehensive documentation and retention requirements, should they fall within the ambit of the final section 29 regulations.