2013 Income tax return for Companies ITR 14: Transfer pricing and thin capitalisation disclosure
On 4 May 2013, the South Africa Revenue Service (SARS) released the new income tax returns for companies (ITR14), which included a new section encompassing questions and disclosure for transfer pricing and thin capitalisation.
Some of the new questions are:
- Did the company enter into an affected transaction as defined in s31 where the company: Received/earned foreign income?
- Did the company enter into an affected transaction as defined in s31 where the company: Incurred foreign expenditure?
If any of the answers are yes, then the following supporting questions will need to be answered:
- Does the company have transfer pricing documentation that supports the pricing policy applied to each transaction between the company and the foreign connected person during the year of assessment as being at arm's length?
- Did the company conduct any outbound transaction, operation, scheme, agreement for no consideration with a connected person that is tax-resident outside South Africa?
- Did the company transact with a connected person that is tax-resident in a tax haven/low tax jurisdiction?
- Did the company make a year-end adjustment to achieve a guaranteed profit margin?
The new disclosure requirements will require companies to breakdown the following items into local, foreign connected and foreign non-connected, if certain questions listed above are answered yes:
- Purchase or sale of goods
- Royalties or license fees
- Administration, management and secretarial fees
- Guarantee fees
- Insurance premiums
- Other finance charges
- Research and development fees
- Other expenses.
It also requires companies to supply its debt-to-EBITDA, interest cover and debt-to-equity ratios for the new thin capitalisation requirement.
Thin capitalisation rules: Will there be a safe harbour going forward?
Removal of current safe harbour
SARS recently published a draft Interpretation Note in respect of Thin Capitalisation. Thin capitalisation, up to recently, has been governed by a 'safe harbour' rule which prohibited the deduction of interest paid to a non-resident connected party of a South Africa company, to the extent that that loan exceeded three times the amount of the company's fixed capital (fixed capital included share capital and retained income subject to certain adjustments thereto).
The draft interpretation note now published states that the current safe harbour rule will fall away, once that interpretation note has become final, with effect from years of assessment commencing on or after 1 April 2012.
This, of course, will cause significant uncertainty for taxpayers, and KPMG is in the process of submitting comments in respect of this and other items in the draft interpretation note.
Proposed new safe harbour
On 29 April 2013, National Treasury published new rules relating to the limitations against excessive interest tax deductions, and in its proposal, National Treasury proposes that a Binding General Ruling will come into effect. This will introduce a potential safe harbour rule, which will apply to cross-border connected-party interest payments, and address thin capitalisation going forward.
This safe harbour will provide that interest on cross-border connected-person debt must satisfy the following two criteria:
- Interest on the connected person debt may not exceed 30 percent of taxable income with no adjustment for other interest received, accrued, interest paid or incurred.
- The suitable interest rate will depend on the currency denomination of the loan. The interest on the debt may not exceed the foreign equivalent of the South African prime rate if denominated in foreign currency and, if the
- denomination of the foreign loan is Rand, the interest rate on the debt may not exceed the South African prime rate.
The above safe harbour is currently still in the form of a proposal. Should this proposal be accepted, there will be a much greater element of certainty for South African taxpayers entering into, or having entered into, foreign loan arrangements with connected parties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.