The South African Revenue Service ("SARS") is, in accordance with section 3(2)(j) of the Tax Administration Act, 28 of 2011 (the "TAA"), responsible for giving effect to the Country-by-Country Reporting Standard for Multinational Enterprises (the "CbC Reporting Standard") which was developed under the Organisation for Economic Co-operation and Development's ("OECD's") base erosion and profit shifting ("BEPS") Action Plan 13 – "Re-examine Transfer Pricing Documentation".
The OECD's recommendation under Action Plan 13 was that all countries should adopt a standardised approach to transfer pricing documentation which follows a three-tiered structure consisting of a master file, a local file, and country-by-country ("CbC") report.
The implementation of the CbC Reporting Standard by SARS will be effected through regulations issued by the Minister of Finance under section 257 of the TAA. A draft version of these regulations was published on 11 April 2016 (the "Draft Regulations"). The Draft Regulations specify the changes to the CbC Reporting Standard required for South Africa's circumstances. The public are invited to submit comments on these Draft Regulations on or before 3 May 2016.
As a multinational enterprise's CbC report is informed by the transfer pricing records maintained by the multinational enterprise (albeit to a lesser extent than the master file and local file) pursuant to the publication of the Draft Regulations, a draft public notice on the keeping of transfer pricing records was published by SARS on 15 December 2015 (the "Draft Public Notice"). The Draft Public Notice proposes extensive and comprehensive documentation requirements for a South African tax resident multi-national enterprise which has a consolidated group turnover of R1-billion or more.
In accordance with the Draft Regulations, it is proposed that where the ultimate parent entity of an multi-national 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 proposed threshold of R10-billion is welcomed as it represents a nearer equivalent amount in South African currency to the OECD recommended threshold €750-million. The proposed threshold of R1-billion, which was recommended by the Davis Committee and which was again recommended in the Draft Public Notice, was criticised as being too low.
The Draft Regulations will not require information that goes beyond what the OECD guidance recommends despite the Davis Committee recommendation that that the CbC report should contain additional transactional data regarding related party interest payments, royalty payments and related party service fees. In fact, the draft Regulations specify that the CbC report must contain the information set out in, and apply the definitions and instructions contained in, the standard template set out in "Annex III to Chapter V" in the OECD/G20 Base Erosion and Profit Shifting Project Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 – 2015 Final Report.
The CbC report must be filed with SARS, by no later than 12 months after the financial year end of the multi-national enterprise group. The Draft Regulations are effective for financial year ends commencing on or after 1 January 2016 and 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 following the signing of a Multilateral Competent Authority Agreement for the automatic exchange of CbC reports by the South African Government on 27 January 2016. See our article " Electronic format for the exchange of CbC reports released" for further information on this aspect.
The Draft 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. However, as "other BEPS related risks" is a very wide and all-encompassing term, it could be used by SARS to conduct audit investigations in respect of variety of aspects of the South African multi-national enterprise's business and therefore there is a risk that the purpose for which SARS obtains and utilises the information in the CbC report extends beyond these parameters.
SARS is required in terms of the Draft Regulations to maintain the confidentiality of the CbC report at least to the same extent that would apply if such information were provided to it under the provisions of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
South African multinational enterprises are encouraged to put in place operational and organisational structures in order to generate a preliminary CbC report and assess and evaluate the outcome to identify risk areas in preparation for the imminent filing of CbC reports in South Africa.
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.