South Africa budget includes plan to rewrite rules on transfer pricing documentation, digital businesses

South Africa’s government intends to propose new transfer pricing documentation and reporting rules and to revise controlled foreign company (CFC) rules relating to the digital economy, according to 2015 budget documents released February 25.

The proposals will be “in line with” the OECD work on base erosion and profit shifting (BEPS) and will be consistent with a December 2014 report, prepared by the Davis Tax Committee, which advises the government on how to react to OECD BEPS output, the budget documents said.

Under the new documentation rules, “tax returns will place a greater focus on indicators of potential base erosion and profit shifting,” the government said.

Finance Minister Nhlanhla Nene said the new rules will “combat financial leakages which deprive our economy of billions of rand through erosion of the tax base, profit shifting, and illicit money flows.”

The budget includes $3 billion in new taxes and spending cuts. Taxes are lowered on the poor and raised on the rich. Taxes on gasoline, cigarettes, and alcohol are increased. Small business receives a tax cut.

International tax provisions include a withdrawal of special foreign tax credits for service fees sourced in South Africa, which the government said were being abused and caused compliance burdens.

The budget also proposes to reinstate diversionary rules applicable to the sale of goods by a CFC to a connected resident.

The government said it is considering relaxing rules designed to counteract BEPS that impose capital gains tax on cross-issue of shares. These rules may be affecting legitimate commercial transactions and curtailing growth, the government said.

Changes are proposed to rules concerning withholding on disposal of immovable property by non-residents. Further, clarifications are proposed to the definition of interest for purposes of withholding taxes, the government said.

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