South Africa: transfer pricing record-keeping rules finalized

by Jens Brodbeck

The South African Revenue Service (SARS), on 28 October, published a final notice (GN 1334) setting out new record-keeping requirements for transfer pricing transactions applicable to years of assessment beginning on or after 1 October, moving South Africa one step closer to having final transfer pricing documentation rules.

Following the publication of the OECD’s final report on Action 13 (Transfer Pricing Documentation and Country-by-Country Reporting) of the Base Erosion and Profit Shifting (BEPS) project, South Africa released various drafts containing transfer pricing documentation requirements. The recent notice is the first of the drafts to be published in final form.

This article summarises the current state of BEPS Action 13 implementation in South Africa in the light of this new development.

Country-by-country reporting

SARS, as South Africa’s competent authority, is a signatory to the Multilateral Competent Authority Agreement on the Exchange of Country-by Country (CbC) Reports. South Africa was one of several emerging market participants in the BEPS project which argued for more extensive disclosure of royalty, interest, and service fee payments in CbC reports. This stance was in line with the recommendations of South Africa’s Davis Tax Committee, established to assess South Africa’s tax policy framework. Despite this, South Africa’s draft regulations on CbC reporting, published on 11 April, do not require information beyond that recommended in the final report on Action 13.

Under the draft regulations, an MNE group whose ultimate parent entity is a South African tax resident with a consolidated group turnover of more than ZAR 10-billion (USD 692 million), must file a CbC report with SARS. It is proposed that the regulations, when finalised, will apply to fiscal years commencing on or after 1 January.

Disclosure in tax return

On 18 April, shortly after the publication of the draft regulations on CbC reporting, SARS released an updated corporate income tax return (ITR14) containing significant new requirements for disclosure of transfer pricing information. The information required includes the additional transactional data that the Davis Tax Committee recommended be included in the CbC report (i.e. a break-down of intra-group interest, royalties and service fees by jurisdiction). It is important to understand, however, that in terms of the Multilateral Competent Authority Agreement on the Exchange of CbC Reports, SARS is not obliged to share this information with other jurisdictions.

South Africa transfer pricing record-keeping rules

As was the case with earlier drafts of the record-keeping requirements, the language used in the final notice does not follow that used by the OECD in the Action 13 report, resulting in the potential for confusion. In substance however, the requirements of the notice are similar, though more extensive, than those recommended by the OECD in the context of the guidance on transfer pricing documentation based on the master file / local file concept. It is also important to understand that there is no requirement for the records specified in the final notice on record-keeping to be submitted to SARS as a matter of course. They are simply required to be available in case of audit enquiries.

The notice distinguishes between records relating to the taxpayer’s structure and operations (which are broadly similar to those required for the OECD’s master file) and those relating to specific transactions (which are broadly similar to those required for the OECD’s local file). Structural and operational records must be kept by taxpayers whose “potentially affected transactions,” ( cross-border transactions between connected parties) exceed or are reasonably expected to exceed ZAR 100 million (USD 6.9 million) in aggregate value for the year of assessment.

Taxpayers required to keep structural and operational records must also keep transaction-specific records for any potentially affected transaction which exceeds or is reasonably expected to exceed ZAR 5 million in value. Taxpayers entering into potentially affected transactions which fall below this threshold are nevertheless required to keep sufficient records for SARS to be satisfied that the transactions took place at arm’s length.

One area where the transactional record-keeping requirements in the notice deviate significantly from the OECD’s local file requirements relates to “financial assistance transactions.. Entities which are party to intragroup finance transactions involving a South African resident should be aware of the additional documentation that may be required of them.

Master file and local file

While the above mentioned record keeping requirements are to a large degree based on the underlying concepts of the OECD’s master file / local file concept, it appears from the wording of the briefing note to the final notice that, in the not too distant future, additional information based on the master file / local file concept, as contemplated in the Action 13 report, will be required to be submitted together with the corporate income tax return (ITR14).