South African Revenue Service releases public notice on recordkeeping for transfer pricing transactions

Transcription

1 9 November 2016 Global Tax Alert News from Transfer Pricing South African Revenue Service releases public notice on recordkeeping for transfer pricing transactions EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 28 October 2016, the South Africa Revenue Service (SARS) released a public notice (the Notice), setting out record-keeping requirements with respect to potentially affected transactions. 1 The Notice contains a schedule (the Schedule) that indicates to which taxpayers the Notice applies, and which records, books of account or documents are to be kept by such taxpayers. The Notice applies to years of assessment commencing on or after 1 October While there is some overlap between the information mentioned in the Schedule and information that is typically found in a transfer pricing documentation report, it is important to note that the Notice does not require taxpayers to include all information in a separate report. It is expected that specific transfer pricing documentation requirements, in line with the final recommendations in the final report on Action 13 (Transfer Pricing Documentation and Countryby-Country Reporting) of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project will be released at a later stage. Detailed discussion The Schedule, included in the Notice, outlines to which taxpayers the Notice applies, and which records, books of account or documents are to be kept by such taxpayers.

2 2 Global Tax Alert Transfer Pricing Persons to whom the Notice applies As per the Notice, a person is required to comply with the record-keeping requirements if that person has entered into a potentially affected transaction and if the aggregate of that person s potentially affected transactions for the year of assessment exceeds, or is reasonably expected to exceed, R100 million (approx. US$7.4 million). For the purpose of assessing whether a person exceeds this threshold, offsetting of one potentially affected transaction against another is explicitly not allowed. Records to be kept in respect of structure and operations Persons as defined above are required to retain records, books of account or documents with respect to their structure and operations. This includes information on the taxpayer s ownership structure, information about each of the connected persons with which potentially affected transactions have been entered into, and a summary of the taxpayer s operations (including a description of the business, an organogram showing the title and location of the senior management team members, and a description of major economic and legal issues affecting the profitability of the person and the industry). Records to be kept in respect of transactions Furthermore, persons to whom the Notice applies are required to keep specific records with respect to any potentially affected transaction that exceeds, or is reasonably expected to exceed, R5 million (approx. US$73,000) in value. The records to be kept with respect to such transactions include, among others: The nature and terms (including pricing policy) of the potentially affected transactions Copies of any contracts or agreements related to the potentially affected transactions An indication of which party to the potentially affected transaction is the tested party, if applicable, and an explanation of the reasons for the party s selection Governance and regulatory documents, such as complete board minutes and South African Reserve Bank applications and approvals, relevant to the potentially affected transactions In addition, the Schedule prescribes that, in respect of transactions involving a foreign tested party, a person to whom the Notice applies is required to keep documents that evidence the functional and risk classification of the tested party. Such documents include: A description of the business (including the type of business, details of the specific business, an organogram showing the title and location of staff involved in the affected transaction and external market conditions) and the plans for the principal trading operations (including the business strategy) Contracts between the tested party and its customers and suppliers Commercial invoices between the tested party and its customers and suppliers With respect to potentially affected transactions that are financial assistance transactions (exceeding the R5 million threshold mentioned above), the Notice requires the following records to be kept: A summary of financial forecasts which are contemporaneous with the financial assistance transactions in question, projected as far as is meaningful in relation to the period of the funding transactions, including a clear picture of the expected levels of interest cover, gearing or other relevant measures over the forecast period An analysis of the financial strategy of the business, including how capital is allocated and the relationship between capital and cash flows from operations and any changes relating to the financial assistance transactions and details regarding principal cash flows and the sources of repayment of debt With respect to potentially affected transactions that are financial assistance transactions with a term exceeding 12 months, the following additional records: A description of the funding structure which has been or is in the process of being put in place, including the dates of transactions, a clear statement of the source of the funds (immediate and ultimate), reasons for obtaining the funds, how the funds were or will be applied (the purpose of the financial assistance) and the repayment terms A group structure covering all relevant companies and clearly setting out any changes to the structure taking place over the course of the financial assistance transactions

3 Global Tax Alert Transfer Pricing 3 Copies of the financial statements and management accounts prepared most recently before the point in time the financial assistance is obtained and after the financial assistance has been granted Where a person reasonably expects to have a high volume of potentially affected transactions that are financial assistance in nature, SARS may agree to alternative records that the person must keep (for those transactions) to enable the person to ensure and SARS to be satisfied that those transactions are conducted at arm s length. Transactions not exceeding the threshold If a person has entered into a potentially affected transaction not exceeding the R5 million threshold mentioned above, that person must keep the records, books of account or documents that enable the person to ensure, and SARS to be satisfied, that the potentially affected transaction is conducted at arm s length. Records kept by connected persons Subject to certain conditions being met (e.g., being able to provide records to SARS for inspection), a South African taxpayer can comply with the recordkeeping requirements even if certain records are kept by a (foreign) connected persons. The Notice, for example, states that a taxpayer can comply with the recordkeeping requirements where the records, books of account or documents required to be kept ( ) are kept in the ordinary course of business by a connected person. Key changes compared to prior version The Notice follows a draft and a revised draft notice that were released in December 2015 and July 2016 respectively. Changes were made based on feedback received by SARS from various interested parties. The most notable changes between the Notice and the previous draft are: The threshold for determining whether the Notice applies to a person has changed from the higher of 5% of the person s gross income or R50 million, to R100 million. It has been clarified that for purposes of assessing whether a person exceeds this threshold, offsetting of one potentially affected transaction against another is explicitly not allowed. The threshold for recordkeeping requirements at the transactional level has increased from R1 million to R5 million. A possibility has been introduced to discuss alternative recordkeeping requirements with respect to transactions that are financial assistance. Impact South African taxpayers should assess whether the Notice generally applies to them, to assess whether they can comply with the general recordkeeping requirements (i.e., pertaining to structure and operations), to identify relatedparty transactions exceeding the R5 million, and to assess to which extent they can comply with the transaction-specific recordkeeping requirements. 2 Endnotes 1. Defined as a transaction, operation, arrangement, scheme or understanding with a foreign connected person. 2. For a complete overview of the record-keeping requirements, see LAPD-LSec-TAdm-PN %20-%20Notice%201334%20GG% %2028%20October% pdf.

4 4 Global Tax Alert Transfer Pricing For additional information with respect to this Alert, please contact the following: Ernst & Young Advisory Services (Pty) Ltd, Johannesburg Justin Liebenberg Michael Hewson Michel Verhoosel

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