Cross border transfer pricing legislation has been around since 1995, but
few taxpayers pay sufficient attention to it.
"Transfer pricing" refers to the price at which goods and services are
transferred between two parties (this includes interest on loans).
The legislation regulates the price charged for goods and services between
connected parties, one of whom is ordinarily resident in South Africa, and
the other outside South Africa.
The legislation aims to prevent the South African Revenue Service (Sars)
being prejudiced by the parties trying to move taxable profits into another
country with a lower tax rate.
Clearly, the law does not apply if you do not send or receive goods or
services to or from abroad in the course of your business, for example if
you are merely receiving a gift from a relative overseas.
But if in terms of normal tax rules you would be required to include an
amount of income in, or would be allowed to deduct an amount of expenditure
from, your taxable income, and the transaction is with an offshore
connected party, you must be able to show that the price you are charging
or being charged can be compared to the amount that would have been charged
in an arm`s length transaction.
If Sars thinks that the price is not comparable to a third party
transaction, you may find yourself with a bill for the income tax on the
difference between the actual amount of the transaction and the amount at
which Sars believes it should have been.
You may also be liable for a penalty (up to twice the amount of tax
charged) and interest at 16 percent from when the tax was payable.
In addition, if the transactions are between your company and an offshore
shareholder, their relative or a trust of which the shareholder or relative
is a beneficiary, you may also be liable for secondary tax on companies
(STC), plus penalties and interest. This will be levied at 12,5 percent on
the difference between the actual amount and the amount that Sars considers
to be reasonable.
So how do you avoid trouble in this arena? Firstly, if you have established
that you do have international transactions with connected parties, you
need to review and document your transfer pricing policies. I will discuss
this in more detail in next week`s article.
It is important to be aware of the concept of "financial assistance". If,
for example, an overseas company is an investor in your company or is
entitled to participate in 25 percent or more of its dividends, profits or
capital or exercise 25 percent or more of the votes and Sars is of the
opinion that the total of all financial assistance (loan provided by the
overseas investor), is excessive in relation to your company`s fixed
capital, it may disallow the interest charged by the offshore investor on
the amount regarded as excessive.
If your offshore investor has provided funds to your company in the form of
share capital and loans, and the loans exceed three times the amount of the
capital invested, the interest on the part of the loans exceeding three
times the capital will not be allowed as a tax deduction.
Deborah Tickle is a tax partner at accounting firm KPMG
For answers to tax questions of a general nature for publication write to:
Deborah Tickle, Personal Finance, P O Box 56, Cape Town, or e-mail