Transfer Pricing – What Does it All Mean?
27 March 2015
BDO South Africa's Head of Transfer Pricing – Roxanna Nyiri gives a break down
Johannesburg, xx March 2015 – ‘We need to take further steps to combat base erosion and profit shifting while we continue to focus on transparency and support of information,' said Finance Minister Nhlanlha Nene.
This means that the following will transpire as put forward by the Davis Tax Committee Interim Report:
- Transfer pricing Documentation to become compulsory
- The revision of Transfer Pricing Practice Note (PN) 7 to be in line with the Revision of OECD Transfer Pricing Documentation Guidelines contained in Chapter 5
- The implementation of a 3 tiered approach to Transfer Pricing in SA as published by the OECD in 2015 which entails the preparation of a master file, local file and country-by-country reporting which is compulsory for large Multinational Enterprises defined by the Davis Committee Interim Report to include companies with a threshold of over R1 billion group turnover
- More specific information as to what is required detailed in a revised PN
- This will increase the cost of doing business in SA although it is proposed that SARS balance the request for documentation against expected cost and administrative burden on the taxpayer
- The competitive landscape will become more intense with increased transparency and symmetry of information between taxpayers and tax administrators. Tax administrators will be able to have a big picture view of a taxpayer's supply chain which will increase the risk of audit and potential assessments
- It will also discourage companies from using favourable jurisdictions for international tax planning which would mean that the effective tax rate of MNE Groups as a whole may increase.
In terms of an intercompany transfer, this is the sale/purchase of goods, the provision/receipt of services including financial assistance and guarantees. It would also include the granting/receipt of the rights to Intellectual Property (IP). There is always the incentive to price intercompany transfers of goods and services in such a way so that maximum profit is retained in the low tax-paying countries, hence the Base Erosion Profit Shifting (BEPS) initiative.
The implications of this on large and small companies is that SARS could make transfer pricing adjustments to reflect arm's length pricing. These adjustments could also have a withholding tax implication as they could be considered to be a deemed distribution in specie. There would also be penalty and interest implications.
I would advise companies to have transfer pricing documentation in place in support of arm's length i.e. market-related pricing and make sure that it is implemented correctly.