On 1 July 2016, the Commissioner for the South African Revenue Service ("SARS") released a draft notice ("Draft Notice") of the duty to keep records, books of account or documents in terms of section 29 of the Tax Administration Act, 2011 ("TAA"). Following a round of public comments in relation to the Draft Notice, on 28 October 2016, SARS released a final version of the notice, setting out the documents required to be kept specifically for transfer pricing purposes ("Final Notice").
Records, books of account or documents to be kept in respect of structure and operations
In terms of the Final Notice, a person is required to keep
records where the person has entered into a "potentially
affected transaction" and the aggregate of the potentially
affected transactions for the year of assessment exceeds or is
reasonably expected to exceed ZAR100-million. This threshold was
increased from the Draft Notice's threshold of the higher of 5%
of the person's gross income or ZAR50-million.
A "potentially affected transaction" is, essentially, a transaction, operation, scheme, agreement or understanding where that transaction has been directly or indirectly entered into by or with a South African resident, a permanent establishment in South Africa, or a controlled foreign company of a resident and a non-resident and those persons are "connected persons" in relation to one another.
In terms of the Final Notice, a person who has entered into a "potentially affected transaction" is required to keep, inter alia, the following records in relation to its structure and operations:
- a description of its structure, detailing shareholding and other persons with which the person is transacting
- details of each connected person with which a potentially affected transaction has been entered into
- a summary of the business operations including a description of the business, an organogram, an industry analysis and the role of the person and its connected persons in the group's supply chain.
Records, books of account or documents to be kept in respect of transactions
A person that has entered into a "potentially affected transaction" must keep records in respect of any such transaction that exceeds or is reasonably expected to exceed ZAR5-million in value (previously a threshold of ZAR1-million).
In terms of the Final Notice, a person who has entered into a potentially affected transaction, as set out above, is required to keep, inter alia, the following records in relation to its transactions:
- a description of the potentially affected transactions entered into
- copies of the agreements as well as any governance or regulatory documents in relation to the potentially affected transactions
- a description of the selection of the tested party
- a segmentation of the revenues, costs, expenses and profits between transactions with connected persons and independent persons, including records of the application of the transfer pricing policy that shows how the financial data used reconciles with the annual financial statements
- a description of the functions performed, risks assumed and the assets employed in the potentially affected transactions, together with a description of any intangible assets involved
- where the tested party is a tax resident outside of South Africa, details of the functional and risk classification of the tested party
- operational and cash flows of the potentially affected transactions
- the comparable data and methods used for determining the arm's length return and the analysis performed to determine the arm's length prices or the allocation of profits and losses
- details of adjustments made to transfer prices to align them with the arm's length return determined under section 31(2) of the Income Tax Act, 1962 and consequent adjustments made to the income or expenses for tax purposes
Specific requirements in respect of transactions involving financial assistance
Specific requirements have been included in the Final Notice with respect to potentially affected transactions, including those with a term exceeding 12 months, that are financial assistance transactions. For these transactions, inter alia, the following records are required:
- a summary of financial forecasts
- an analysis of the financial strategy of the business
- a description of the funding structure, with the source of the funds and the reasons for the funding
- change to the group structure over the course of the financial assistance transactions
- copies of financial statements before and after the financial assistance has been granted
Some relief is provided in respect of transactions involving financial assistance. In particular, where a person expects to have a high volume of potentially affected transactions involving financial assistance, SARS may agree to alternative records that the person may keep to enable the person to satisfy SARS that the transactions are conducted at arm's length.
Interaction with other provisions relating to transfer pricing documentation
OECD Action 13 Report
The Organisation for Economic Cooperation and Development ("OECD") published its report on Base Erosion and Profit Shifting, Action 13, Transfer Pricing Documentation and Country-by-Country Reporting ("Action 13 Report"), which recommended a three-tiered approach to transfer pricing documentation, requiring a global master file, a local file and a country-by-country Creport.
The briefing note which accompanied the Final Notice ("briefing note") provides that the "master file" and "local file" returns will be submitted under section 25 of the TAA. Similarly, CbC reports will also be submitted under section 25 of the TAA, read with the regulations issued by the Minister of Finance. The Minister of Finance has previously issued draft regulations for public comment in respect of CbC reporting, however, the final regulations, which will entrench CbC reporting in domestic legislation, are yet to be published.
Section 25 of the TAA essentially requires a person to submit a return in a prescribed form and manner and by a date specified in a tax act or a date specified by public notice. Although it is not clear what the form or manner is in which SARS will require the master file and local file return to be submitted, nor by which date SARS will require such master and local files to be submitted, it is assumed that the documents that are required to be retained in terms of the Final Notice will form the basis of the master file and local file returns required by SARS. Further guidance is therefore required from SARS in respect of the submission of master and local file returns.
Practice Note 7
In terms of the briefing note, Practice Note 7 of 1999 ("Practice Note 7") (which sets out the SARS approach to transfer pricing, and is based on the version of the transfer pricing legislation which applied prior to 1 April 2012), is overridden by paragraphs 1 – 4 and 6 – 7 of the requirements set out the Final Notice. The Final Notice, presumably, only overrides paragraph 10 of Practice Note 7, which deals with transfer pricing documentation, and presumably does not override Practice Note 7 in its entirety.
As paragraph 5 of the Final Notice (which deals with the record keeping requirements where a transaction is below the ZAR5-million transactional threshold) does not override Practice Note 7, the provisions of Practice Note 7 will presumably still apply to smaller transactions, which fall below the ZAR5-million threshold.
Chris de Bruyn in a candidate attorney in ENSafrica's tax department.
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.