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Taxation
Thursday, February 18, 2016 - 03:16
International catch

Transfer pricing documentation for large taxpayers will soon be compulsory, rather than simply preferred best practice. However, the additional record-keeping requirements proposed by the South African Revenue Service (SARS), relating to cross-border transactions carried out by South African multinational companies, may be overly burdensome and costly, warns PwC International Tax Services.
On 15 December 2015, SARS issued a draft notice in terms of section 29 of the Tax Administration Act, 2011. The Draft Notice sets out additional record-keeping requirements for “potentially affected transactions” (cross border related party transactions) where the taxpayer has a consolidated South African turnover of R1 billion and above. The effect of this notice is that, once issued in final form, it will become compulsory for large multinationals with consolidated turnover in excess of R1 billion, to prepare transfer pricing documentation. Furthermore, as the Draft Notice does not contain any reference to materiality thresholds on a per transaction basis, supporting documents and information need to be given for all potentially affected transactions, even where such transactions are not material in the context of the overall business. The Draft Notice also does not provide any indication regarding when the new requirements will become effective.
An amendment contained in the Tax Administration Laws Amendment Act, 2016 (promulgated earlier this year), also includes a definition of “international tax standard” which, amongst other things, refers to the ‘country-by-country’ reporting (CbCR) standard for multinational enterprises. Despite the amendment, it is not yet clear how CbCR will be implemented in South Africa and the Draft Notice does not include any comments regarding this aspect. In line with the Organisation for Economic Co-operation and Development (OECD) documentation requirements, the CbCR needs to be completed for entities with turnover in excess of 750 million Euro (approximately R12.9 billion at the current exchange rate). Based on the recommendations by the Davis Tax Committee, it appears that a lower threshold of R1 billion rand will be applied in South Africa to transfer pricing documentation in terms of the Draft Notice. There is no current South African guidance on a threshold for CbCR. This threshold is substantially less than the OECD threshold and so may put South African taxpayers at a disadvantage compared to their international competitors. 
As part of continuing efforts to boost tax transparency by multinationals, 31 countries including South Africa, signed a new tax cooperation agreement - Multilateral Competent Authority Agreement (MCAA) - on 27 January 2016. Under the MCCA, information will be exchanged between tax administrations, giving them a single, global picture on the key indicators of multinational businesses. The MCCA is also intended to ensure efficient implementation of new transfer pricing reporting standards developed under the OECD’s Base Erosion and Profit Shifting (“BEPS”) Action Plan 13.
David Lermer, Global Tax Network Leader for PwC Africa, says: “Governments need to be careful that when transfer pricing documentation requirements are introduced, they do not go far beyond what is expected of companies operating in other countries.  Transfer pricing legislation and related requirements should be aligned with international best practice including the Transfer Pricing Guidance issued by the OECD. In South Africa, there appears to be a tendency, when drafting legislation or information compliance requirements, to ask for additional information beyond what is required or practicable. This draft notice appears to be a case in point”.
Although South Africa has taken significant strides to align itself with international developments and best practice on transfer pricing, the proposed record keeping requirements for multinationals contained in the Draft Notice issued by SARS appear to go too far, comments Lermer. “There is cause for concern in the detail required. To keep extensive records of a potentially affected transaction is distinctly uncommercial, economically unsound in the current market climate, and costly for multinationals to comply with in the proposed form. There needs to be a more commercial balanced approach.” For example, in certain circumstances, the South African taxpayer is required to retain copies of invoices and agreements relating to its offshore related persons’ transactions with third party customers (which may include the general public) and suppliers. Similarly, the Draft Notice requires South African taxpayers to provide information regarding key value drivers supported by independent industry research findings or reports. For large South African outbound companies, this represents a significant problem as independent industry research findings or reports may not necessarily exist for certain countries and industries, especially in Africa. The information requested in the context of financial assistance is also onerous and in certain instances, for example, where there are frequent movements in outstanding loan balances, it will be very difficult, if not impossible to retain and provide the information set out in the Draft Notice. Interestingly, the Draft Notice does not make any explicit reference to the Master File and Local File transfer pricing documentation approach recommended by the OECD as part of Action 13.
“We appreciate that SARS needs information to assist it with risk profiling and transfer pricing audits. Taxpayers should, however, not be subjected to overly burdensome compliance requirements.  Multinationals should submit comments to SARS by the 5 February 2016 submission date to ensure that the final draft is more commercially balanced in line with the OECD requirements on transfer pricing documentation."

Copyright © Insurance Times and Investments® Vol:29.2 1st February, 2016
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