Roxanna Nyiri, Head of Transfer Pricing BDO
JOHANNESBURG — Multinational companies operating in South Africa are in a rush to comply with our new Country-by-Country (CbC) reporting standards.
Finance Minister Pravin Gordhan’s Budget Speech heralded South Africa’s implementation of Action 13 of the CbC reporting methods recommended by the Organisation of Economic Co-operation and Development (OECD).
These are part of the Base Erosion and Profit-Shifting (BEPS) measures that have been in the works worldwide since about 2013. The principle behind them is to make it harder for multinational enterprises to exploit differences in tax rates between countries to avoid their tax obligations.
Given the multinational nature of global trade, Action 13 seeks to address BEPS through a multilateral instrument that allows tax authorities to share information and requires companies to file complete reports on their activities in all their countries of operation.
Most companies are unanimous on the need for the BEPS Action Plan and the noble motivation behind regulating transfer pricing among multinationals. But the compliance burden is going to be significant, and not all are ready for it.
“When it comes to transfer-pricing compliance,” says Roxanna Nyiri, Head of Transfer Pricing at BDO, “as in most things, knowledge is power.”
Nyiri explains that the OECD published its requirements for CbC report as part of the revised Chapter V to the OECD Guidelines, with a new three-tier approach to transfer pricing documentation. The three tiers comprise a master file, a local file and a CbC report.
A master file is envisaged as a high-level overview submitted by the multinational enterprise describing the entire group business. Written in a prose story form, it should touch on organisational structure, the businesses within the group and transactions between them, intangibles used in the business, and financial and tax positions.
The idea is that the master file should be clear and easy to understand. It should also be thorough, and include value drivers, the supply chain, strategy, ownership and finances.
The second tier of the guidelines is the local file, which must detail the international transactions concluded by the local company. It is compiled by the South African entity, whereas the other two tier reports are compiled centrally by the multinational and then shared between international tax authorities.
Thirdly, the CbC report is a table that demonstrates in figures what the master file describes in words. It must be compiled using a template and list aggregate, jurisdiction-wide information and global allocation of income, taxes paid and other economic activities.
“The CbC report is designed for transfer pricing risk assessment and for evaluating other BEPS-related risks,” says Nyiri.
The implementation of the CbC Reporting Standard by SARS has been effected through regulations issued by the Minister of Finance under section 257 of the Tax Administration Laws Amendment (TAA).
The regulations propose that where the ultimate parent entity of a multinational enterprise is a South African tax resident and has a consolidated group turnover of more than R10-billion, it must file a CbC report with SARS.
The Public Notice has been finalised for years of assessment on or after 1 October 2016, and indicates the documentation required to support the arm’s-length nature of transactions for a South African tax resident multinational enterprise.
The documents apply to companies with potentially affected transactions for the year of assessment — without offsetting any potentially affected transactions against one another — that exceed or are reasonably expected to exceed R100 million.
There are additional documentation requirements for any potentially affected transaction that exceeds or is reasonably expected to exceed R5 million in value.
The CbC report must be filed with SARS, by no later than 12 months after the financial year end of the multinational enterprise group. The regulations are effective for financial year ends commencing on or after 1 January 2016. Accordingly, the first CbC reports will be required to be filed with SARS from 31 December 2017.
Once filed with SARS, the CbC reports will be automatically exchanged in electronic format between SARS and tax authorities in 31 different jurisdictions.
The regulations also reiterate the principles in the OECD guidance that SARS may only use the CbC report for assessing high-level transfer pricing and other BEPS-related risks, as well as to perform economic and statistical analysis.
Nyiri says a key consideration for business is that the introduction of country-by-country reporting reflects changing expectations of tax authorities
“CbC reporting considers information at a different level of detail,” she says. “It focuses on transfer pricing and wider tax policy implementation. It is process driven but relies on a solid policy. We recommend that multinational enterprises get high-level compliance advice when it comes to country-by-country reporting,” says Nyiri. “The new regulations are thorough and more complex, and the risk involved in all transfer pricing increases as a result.”
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