Most Read Contributor in South Africa, September 2016
The Davis Tax Committee ("DTC")
recently addressed the issue of base erosion and profit shifting
("BEPS") in South Africa. The
international importance of transfer pricing was once again
emphasized when 4 out of the 15 actions identified in the OECD
Action Plan on BEPS related to transfer pricing. The 15 actions are
scheduled to be finalised in three phases, and the DTC issued its
interim report on the first of these phases, i.e. the September
2014 deliverables. A summary of the DTC's conclusions and
recommendations on 'Action Plan 8: Assure that Transfer Pricing
Outcomes are in Line With Value Creation / Intangibles' are set
The OECD has in the past done extensive work on the transfer
pricing of intangibles which are in line with Action Plan 8. In
Action Plan 8, the OECD recommends that countries develop rules to
prevent BEPS by moving intangibles among multinational enterprise
("MNE") group companies. This will
involve: (i) adopting a broad and clearly delineated definition of
intangibles; (ii) ensuring that profits associated with the
transfer and use of intangibles are appropriately allocated in
accordance with (rather than divorced from) value creation; (iii)
developing transfer pricing rules or special measures for transfers
of hard-to-value intangibles; and (iv) updating the guidance on
cost contribution arrangements.
The DTC reiterates that transfer pricing is a key focus area for
SARS and that the South African Reserve Bank has been approached to
assist in determining the magnitude of BEPS relating to transfer
pricing. The DTC's interim report lists certain recommendations
on transfer pricing in general in South Africa. The DTC recommends
that the legislators should ensure that section 31 of the Income
Tax Act, 58 of 1962 ("the Act") itself,
and not only SARS Practice Note 7 which is not legally binding,
refer to the OECD Transfer Pricing Guidelines. The DTC suggests for
this purpose that a legally binding General Ruling as provided for
in terms of the Tax Administration Act, 28 of 2011 be enacted under
section 31 and that the General Ruling should, without departing
from the OECD Transfer Pricing Guidelines, include principles
reflecting the South African reality. The DTC also recommends that
SARS should ensure that the enforcement capacity of its transfer
pricing unit is adequate and that there is sufficient training and
capacity building in this unit.
The BEPS concern in relation to South Africa-owned IP is the
possibility that MNEs may transfer valuable IP to low tax or
tax-free jurisdictions to ensure a flow of royalty income to that
jurisdiction. In assessing this concern, the DTC, amongst others,
considered the South African exchange control rules which prohibits
the export of South African developed IP and requires South African
based owners of IP, which make the IP available to foreign related
parties, to charge an appropriate royalty for the IP.
The DTC came to the conclusion that Action Plan 8 may not
require major legislative attention in South Africa at this stage.
The DTC is of the opinion that the exchange control restrictions
mentioned above, the punitive tax consequences in terms of section
23I of the Act for the payments of royalties by South African
taxpayers which previously used to own the relevant IP and the
concept of "beneficial ownership" in the royalty article
of double taxation agreements, amongst others, readily prevent
transfer pricing of intangibles in South Africa.
The DTC however, is of the view that the potential
undervaluation of local intangibles in determining profit splits as
well as contract R&D arrangements which are highly artificial
or lacking in substance are of potential concern for South Africa.
The DTC further cautions that care should be taken in developing
tax legislation on transferring of intangibles that is too
restrictive and that limits the development of IP in South
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.
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