The 2017 South African budget review was published on 22 February 2017, and made several comments that will have an impact on cross-border IP transactions.
Government has proposed that companies and individuals no longer need the South African Reserve Bank’s approval for “standard intellectual property transactions” and that the “loop structure restriction for all intellectual property transactions” be lifted, provided that such transactions are arm's length and at a fair market price.
In South Africa, the Income Tax Act, 1962 does not allow deductions for payments made to a foreign person in respect of the use, or right to use, tainted IP.
Section 23I of the Income Tax Act defines "tainted intellectual property" as:
- IP that is or was the property of the South African resident end user of the IP or a connected person to such an end user;
- IP that is or was the property of a South African resident;
- where a material part of the IP was used by a South African resident in carrying on a business while that IP was the property of a South African resident, which was acquired as a going concern by an end user; or
- IP that was discovered, devised, developed, created or produced by the South African resident end user or by a connected person in relation to the South African resident end user, and the end user, together with the connected person, holds at least 20% of the participation rights in the foreign person in question.
For purposes of this section, IP means any patent, design, trade mark, copyright, property or right of a similar nature to the above, and knowledge connected to the use of any of the above.
This provision of the Income Tax Act was introduced to prevent erosion of the tax base resulting from assigning South African IP to foreign entities, subject to lower effective tax rates in the foreign country, followed by the licensing of that IP back to South African taxpayers.
It appears, however, that the government recognises that these anti-avoidance measures may affect legitimate commercial transactions and discourage the use of South African-based group infrastructure to further develop offshore IP. It is intended that relaxation of the policy will be considered without losing sight of the initial policy intent, which is to prevent tax-base erosion.
The government also confirmed that it plans to update its transfer pricing practice note to bring it in line with the Organisation for Economic Co-operation and Development (“OECD”) transfer pricing guidelines relating to intangibles.
The OECD Guidance on Transfer Pricing of Intangibles (the “Guidelines”) provides guidance on how to identify transactions involving intangibles, and provides supplemental guidance for determining arm’s-length conditions for transactions involving intangibles.
Government’s statements display progress in implementing the standards and recommendations set out in the Guidelines. However, it is not yet clear how this will be achieved and how a “relaxed policy” will be implemented. This is a development that we will continue to monitor as it affects almost all cross-border IP transactions.