The transfer pricing regime in the Income Tax Act, 58 of 1962, is regulated by section 31 of that Act. It in essence requires that cross-border transactions be entered into on an arm’s length basis where connected persons transact with one another. The obvious mischief sought to be countered is for connected persons to charge fees between one another to ensure that the party in the most tax beneficial regime is more profitable than the taxpayer in the more onerous tax jurisdiction.
Determining when a fee will be “arm’s length” will necessarily be a facts based determination to be evaluated on a case-by-case basis. For any taxpayer therefore to claim that its transactions are concluded on an arm’s length basis will have to be substantiated by relevant corroborative evidence, primary among which will be whether the prices involved are comparable to industry norms and standards coupled with a commercially defensible transfer pricing policy document setting out how pricing is determined for cross-border related party transactions entered into by the taxpayer (notably intergroup transactions).
The Commissioner for SARS has recently (28 October 2016) published a comprehensive list* of certain information and documents that taxpayers are required to maintain when they enter into cross-border activities with connected persons or branches. This includes:
There are additional requirements for transactions exceeding R 5 million. These notably include keeping on record the necessary exchange control approvals obtained for entering into the relevant transaction.
The notice replaces SARS’ previous reporting requirements contained in its Practice Note 7. The notice issued confirms what we have in recent times started experiencing in practice, being a renewed focus by SARS on transfer pricing as a means of revenue collection for the fiscus.
* See Government Gazette Vol. 616 No. 40375
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