Transfer Pricing document retention net cast wider. Many SMEs to be affected.
The South African Revenue Service (SARS) has released the long-awaited update to its draft notice in terms of section 29 of the Tax Administration Act, 2011 (TA Act). The draft notice outlines key record keeping requirements for transfer pricing transactions.
This is the first time that a South African taxpayer will be required to pay attention to a section which outlines what information and records need to be kept. No doubt, there will certainly be an increase in overall compliance costs for taxpayers to consider.
SARS has been very clear that the final draft notice’s purpose is to create a base of information to be retained that will enable the taxpayer to have all the necessary information in place to be able to form an opinion or analysis on whether the cross border related party transaction (potentially affected transactions) can be supported by the arm’s length principle, as required by section 31 of the Income Tax Act no. 58 of 1962 (Income Tax Act).
In future, if taxpayers do not have this information on hand, they will be contravening the TA Act and a non-compliance penalty could be applicable. The non-compliance penalty would be in addition to any primary and secondary transfer pricing adjustments and related penalties and interest for those adjustments.
There are important updates and changes in the amended draft notice. Most important is the amendment which makes the new requirement applicable to a broader scope of taxpayers. While the previous draft notice was only relevant for a taxpayer with a group consolidated South African turnover of R1 billion or more, the new notice requires a much wider spectrum of taxpayers to heed the Transfer Pricing legislation.
In terms of the updated draft notice, it appears that the R1 billion threshold has been seen to be too burdensome on taxpayers that may not have material related party transactions.
This threshold has been changed and the amended draft notice’s threshold reads as follows:
“A person must keep the records specified in paragraph 3 and 4 if the person—
- (a) has entered into a potentially affected transaction; and
- (b) the aggregate of the person’s potentially affected transactions for the year of assessment exceeds or is reasonably expected to exceed the higher of—
- (i) 5 per cent of the person’s gross income; or
- (ii) R50 million.”
The above amendments mean that it will be far more likely for more taxpayers to fall within the new requirement. For example, where a taxpayer has less than R1 billion turnover but potentially affected transactions of over R50 million, this taxpayer will have to meet the requirements as per the amended draft notice.
Paragraphs 3 and 4 which are referred to in the definition above, and which are part of the amended draft notice, provide a list of the information required. Paragraph 3 refers to questions which assist in detailing the overall information about the taxpayer, while
Paragraph 4 is only applicable to potentially affected transactions which exceed, or are reasonably expected to exceed R1 million. The Tax Advisory team assumes that this is SARS’ definition referred to above of “material in relation to potentially affected transactions”.
It is important to note, however, that where a transaction falls below R1 million, it would not require information as per that which is set out in section 4, but the transaction would still need to be considered according to “arm’s length” as per section 5 of the notice.
The full list of information required can be reviewed at the following link - Click here to read Section 3 and 4
SARS’ draft notice has been published for a final round of public comment which must be submitted on or before 19 August 2016. Grant Thornton’s Transfer Pricing team believes that the majority of comments are expected to focus on the new threshold as this will require many more taxpayers to comply with the amendment and the requirement of how long this documentation must be kept.
It is concerning that the thresholds seem particularly lower than those outlined previously and these new requirements are more than likely going to increase compliance costs for smaller taxpayers. While the R1 billion threshold previously was elected so that small to medium businesses were less affected by the thresholds, the lower thresholds are certainly going to cause greater regulation and red tape for SMEs.
The Grant Thornton Transfer Pricing team believes that the new Transfer Pricing requirements are South Africa’s legislative way of aligning itself to international standards. To date, South Africa has been very lenient when it comes to compulsory transfer pricing documentation retention requirements, yet many countries worldwide, and African countries such as Tanzania, Kenya or Ghana, have already implemented compulsory transfer pricing documentation requirements.
In many ways, SARS is formalising an approach which has been informally in place already. Taxpayers should already have considered the questions under paragraphs 3 and 4 as it is a requirement of section 31 of the Income Tax Act to discharge the onus of being at arm’s length.
It is vital for taxpayers to work closely with skilled advisors in terms of the new requirements because SARS has expressly highlighted that this is a documentation retention requirement and therefore is wider than just a Transfer Pricing document. It will be imperative for multinational companies to work closely with their tax teams to make sure everything is in order, that all elements are documented accordingly and that the right information is in place.
For further information or for assistance with the new transfer pricing record-keeping requirements, please contact Marcus Stelloh.
To read the next article from our August 2016 e-Taxline entitled: Submitting income tax returns for the 2016 year of assessment click here.