In terms of the South African Income Tax Act, 1962 (the “Act”), transfer pricing adjustments are made in circumstances where multinational entities transact at prices that do not reflect prices expected to be charged if parties to the transaction were independent persons dealing at arm’s length.
Base Erosion and Profit Shifting (“BEPS”) refers to tax planning strategies that shift profits from high tax jurisdictions like South Africa to locations where little or no corporate tax is being paid.
In order to provide governments with the necessary domestic and international instruments to prevent companies from paying limited amounts of taxes, the Organisation for Economic Co-operation and Development (“OECD”) formulated the BEPS Action Plan at the request of the G20. The BEPS Action Plan applies to all OECD member countries as well as G20 countries. In addition to this, countries that are not members of the OECD or the G20, such as South Africa, can also follow the guidelines set out in the BEPS Action Plan.
The BEPS Action Plan consists of 15 Action Points with the objective of minimising or eliminating transactions that erode or decrease a multinational entity’s tax base by routing its profits from high tax jurisdictions to low tax jurisdictions. The overriding concept of the BEPS Action Plan is that all taxable profits should be taxed once.
Among the 15 Action Points addressed in the BEPS Action Plan, Action 13, which provides guidance on transfer pricing documentation and country-by-country reporting (“CbCR”), provides one of the bigger challenges to taxpayers in terms of transparency and disclosure. In addition, several other action points build on the disclosure requirements set out in Action 13.
The purpose of this Action Point is to re-examine transfer pricing documentation by developing rules to enhance transparency, including a requirement that multinational entities provide information to all governments in all countries in which it operates. The information to be provided to the local governments includes the allocation of income, the level of economic activity taking place in that jurisdiction, and taxes paid amongst countries in accordance with a standardised template.
As a result, Action 13 details a new standardised three-tiered approach to transfer pricing documentation which is made up as follows:
A Masterfile provides a complete picture of the multinational entity’s global operations, including an analysis of profit drivers, supply chains, group intangibles and group financing.
The Local File
A Local File assures compliance with the arm’s length principle in material transfer pricing positions impacting a specific jurisdiction by providing more detailed information relating to specific intercompany transactions.
The CbCR provides aggregated financial and tax data by tax jurisdiction to facilitate risk assessments.
This approach to transfer pricing documentation will provide revenue authorities with relevant and accurate information to perform an effective transfer pricing risk analysis. In addition, it will provide a platform on which the information necessary for a transfer pricing audit can be developed and provide taxpayers with an incentive to expressively consider and describe their compliance with the arm’s length principle in material transactions.
South African documentation
South Africa has issued its regulations implementing the country-by-country reporting standards for multinational enterprises (“MNEs”) while the South African Revenue Service ("SARS") has published a Public Notice requiring the submission of CbCR, Master File and Local File. These regulations entrench CbCR requirements in South Africa’s transfer pricing regime, and follow legislative changes in South Africa related to the OECD’s BEPS initiative, specifically Action 13.
The Public Notice explains that resident MNEs with a turnover exceeding ZAR10-billion are required to submit CbCR to SARS. These MNEs will also be required to prepare and file, with SARS, a Master File and Local File for financial years commencing from 1 January 2016, with submissions being required 12 months after the last day of the financial year.
Therefore, the first submission deadline (for all three submissions) for December year-ends was 31 December 2017.
South African-resident companies, which are not required to submit a CbCR to SARS, but which enter into cross-border related party transactions (“potentially affected transactions”) that exceed or are reasonable to exceed ZAR100-million per annum without any offsetting, must submit a Master File and Local File to SARS for years commencing from 1 October 2016, with submission being required within 12 months of the company’s year-end.
Therefore, the first submission deadline for Master Files and Local Files only will be 30 September 2018.
Compiling a Master File and Local Files to comply with the transfer pricing documentation retention requirements of SARS is time consuming process, especially where no transfer pricing policy or transfer pricing reports have been prepared before. Therefore, with the deadlines for Master Files and Local Files fast approaching, time is running out and MNEs need to attend to complying with SARS’ documentation requirements as a matter of urgency.