SARS issued a new draft Taxation Laws Amendment Bill, 2014 on 17 July 2014. The draft legislation gives effect to matters presented by the Minister of Finance in the Budget Review 2014, as tabled in Parliament earlier this year.
The draft Taxation Laws Amendment Bill, proposed the scrapping of the “deemed loan” secondary transfer pricing adjustment concept contained in section 31(3) of the Income Tax Act. It is to be replaced by a deemed dividend in specie paid by the South African taxpayer to the non-resident connected person . Therefore, where a South African subsidiary undercharges its foreign parent company, the shortfall will be deemed to be a dividend by the South African subsidiary to its foreign parent.
The explanatory memorandum provides us with two examples:
Foreign parent company pays R65 million for goods provided by the South African subsidiary. The South African subsidiary records taxable income based on the sale to its foreign parent. The arm’s length price for the goods is in fact R100 million.
A primary adjustment in terms of section 31 is effected, whereby the taxable income of the South African subsidiary is increased to reflect the arm’s length price of R100 million. The differential of R35 million constitutes a deemed in specie dividend paid by the South African subsidiary to its foreign parent.
Foreign sister company grants a R1 million loan to the taxpayer (a South African company). Foreign sister company charges interest at a rate of 10 percent, whereas the market related interest rate is six percent. South African company claims an interest deduction of R100 000.
SARS effects a primary adjustment in terms of section 31, whereby interest allowable as a deduction is reduced to the market related interest of R60 000. A secondary adjustment, in the form of a deemed dividend in specie paid to foreign sister company is triggered. Dividends tax is imposed on the R40 000 dividend deemed to have been paid by the South African company.
This amendment is to come into effect on 1 January 2015.