Tax Authority
Commissioner of the South African Revenue Service (SARS)
Relevant Transfer Pricing (TP) regulation
South Africa’s (SA) TP regulations are contained in Section 31 of the Income-tax Act, 1962 (ITA) and are supported by Practice Note 7, which provides additional guidance to taxpayers on determining an arm’s length consideration in relation to cross border related party transactions.
South African TP regulations are based on the Organisation for Economic Co-operation and Development’s (OECD) arm’s length standard. The Guidelines are used for interpretation of the arm’s length principle together with local legislation.
Related Party Disclosure Requirement in the Corporate Income-tax Return
The annual income tax return for corporates (Form ITR14) requires disclosure of whether the taxpayer has entered into any “potentially affected transactions” (i.e. cross-border, related party transactions, regardless of whether the terms thereof are arm’s length) during the year of assessment.
Where potentially affected transactions have been entered into, the taxpayer is required to disclose the value of such transactions in respect of various payment categories (royalties, commissions, service fees etc), on a jurisdiction-by-jurisdiction basis, for the 5 most valuable jurisdictions in each category. These questions serve as a basis for TP risk assessment and therefore need to be considered thoroughly and answered correctly. The annual corporate income tax return must be submitted within 12 months from the end of the relevant year of assessment.
Transfer Pricing Documentations
South Africa follows the three-tiered approach as suggested by the OECD i.e. the Country-by-Country report (CBCR), the Master File and the Local File.
1. Local File
Local file requirements are applicable in South Africa.
Threshold
South African parented multinationals who have an aggregate of potentially affected transactions of more than ZAR 100 million (~ USD 6.3 million) need to prepare and submit local file for financial years starting on or after 1 January 2016.
For South African subsidiaries of foreign parented multinational MNE Groups who have an aggregate of potentially affected transactions of more than ZAR 100 million (~ USD 6.3 million) need to prepare and submit local file for financial years starting on or after 1 October 2016.
However, taxpayers that do not meet the ZAR 100 million (~ USD 6.3 million) threshold should still be able to support their cross border related party transactions via documentational evidence or a basic TP document. Dependent on a number of factors (including materiality) the latter (TP document) need not meet the local file requirements but should contain sufficient support in relation to the cross border related party transactions.
Filing Requirement
A local file is required to be prepared and filed with SARS together with the annual income tax return for corporates i.e. within 12 months from the end of the relevant year of assessment.
Penalty for failure
SARS has recently extended the administrative penalty under Section 210 of the Tax Administration Act No 28 of 2011 (TAA) for non-compliance relating to the submission of the CbC Report, Master File and Local File. The quantum of penalty to be levied would depend on the taxpayer’s taxable income, however, the penalty amount can range from ZAR 250 up to ZAR 16,000 (~USD 15 to USD 1000) a month for each month of non-compliance.
Transfer Pricing Methods
Five methods, as prescribed by the OECD, have been accepted for the purpose of determining arm’s length price.
- Comparable uncontrolled profit (CUP) method: price
- Cost-plus method (CPM): markup on costs
- Resale-price method (RPM): resale margin
- Transaction net margin method (TNMM): net profit margin
- Transaction profit split method (PSM): operating profit and loss split
Determination of Arm’s Length Price/ Margin
As per the TP regulation, there is no need to conduct a fresh benchmarking search every year. A fresh benchmarking search is to be conducted every three years, with a financial update annually.
For undertaking comparability analysis, there is no legal requirement for local comparables, however, it is preferable to have comparable that operate in markets similar to that of South Africa. Further, Multiple-year data can be used for undertaking comparability analysis.
Also, TP regulations provide for the use of Interquartile range to arrive at arm’s length.
Language
TP documentation is to be prepared in English.
2. Master file
Master file requirements are applicable in South Africa.
Threshold
South African parented multinationals who have an aggregate of potentially affected transactions of more than ZAR 100 million (~ USD 6.3 million) will need to prepare and submit Master file for financial years starting on or after 1 January 2016.
For South African subsidiaries of foreign parented multinational MNE Groups who have an aggregate of potentially affected transactions of more than ZAR 100 million (~ USD 6.3 million) will need to prepare and submit Master file for financial years starting on or after 1 October 2016.
Filing Requirement
A master file is required to be prepared and filed with SARS together with the annual income tax return for corporates i.e. within 12 months from the end of the relevant year of assessment.
Penalty for failure
SARS has recently extended the administrative penalty under Section 210 of the Tax Administration Act No 28 of 2011 (TAA) for non-compliance relating to the submission of the CbC Report, Master File and Local File. The quantum of penalty to be levied would depend on the taxpayer’s taxable income, however, the penalty amount can range from ZAR 250 up to ZAR 16,000 a month for each month of non-compliance.
3. Country by Country Report (CbCR)
There is a CbCR notification and CbC report submission requirement in South Africa for years of assessment commencing 1 January 2016.
Threshold
The Country-by-Country Reports (CbC Report) must be submitted by the ultimate parent company of a multinational enterprise (MNE) (or the Reporting Entity if not the same as the ultimate parent) that has a consolidated turnover of ZAR 10 billion or more (or US$850 million or €750 million).
To reiterate, if the South Africa taxpayer is part of a MNE that meets the CbC Report threshold requirements, the CbC Report, master file, and local file filing requirements are applicable to all years of assessment commencing after 1 January 2016.
Filing Requirement
CbC returns are to be submitted within 12 months of the last day of the Reporting Fiscal Year. A CbC Report notification must be submitted by South Africa subsidiaries of a MNE within the CbC Report net.
Penalty for failure
SARS has recently extended the administrative penalty under Section 210 of the Tax Administration Act No 28 of 2011 (TAA) for non-compliance relating to the submission of the CbC Report, master file and local file. The penalty amount that will be charged depends on a taxpayer’s taxable income and can range from ZAR 250 up to ZAR 16,000 (~USD 15 to USD 1000) a month for each month that the non-compliance continues.
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