Tax experts cheer move to fix transfer pricing
12 March 2014
Posted by: Author: Amanda Visser
Author: Amanda Visser (BDlive)
The headache of fictional loans attracting fictional interest "forever and a day" — caused by transfer-pricing rules changing in 2012 — appears to have been relieved by the latest budget.
Before the Treasury’s move this year, a secondary transfer pricing adjustment — which occurs in some transactions between a company and its foreign subsidiaries — had been treated as a deemed loan.
The problem is that a company can almost never get a deemed loan off its books as it is not a loan requiring repayment. The loan attracts interest, which has a tax implication, and this was set to become a recurring problem for companies and tax practitioners.
The Treasury has recognised this as an administrative burden for both the South African Revenue Service (SARS) and taxpayers.
"The accounting treatment of a deemed loan’s repayment and interest is difficult, because there is no legal obligation to repay the loan," the Treasury says in the 2014 Budget Review. "It is recommended that the transfer pricing provision be amended to state that the secondary adjustment is deemed to be a dividend or capital contribution depending on the facts and circumstances."
Multinational companies operating in South Africa need to charge arm’s-length prices for goods or services bought from or sold to a related foreign entity to avoid triggering a transfer-pricing adjustment. An adjustment is made where a South African entity has undercharged or overpaid a foreign-related entity for goods or services.
BDO tax partner David Warneke explains that because the adjustment has been considered to be a deemed loan after the changes in 2012, there had to be deemed interest charged. Until this fictional loan was repaid, the company had to account for the deemed interest "forever and a day".
"This is not a real loan, it is just a fiction for tax purposes, and that is what has been causing the headaches. It is welcomed that the Treasury is proposing to tax the adjustment as a deemed dividend or a capital contribution, which will bring closure," Mr Warneke says.
How a dividend will be distinguished from a capital contribution will become clear only once the draft taxation laws are published and the matter is opened for comment in about June.
Deloitte tax director Billy Joubert says the proposed change in the budget is likely to bring about a "one-off withholding dividend tax" of 15% on a deemed dividend, levied on the value of the adjustment where there has been an overcharge or underpayment, compared with paying tax on the interest of the deemed loan forever.
The deemed-loan headache began to be felt last year, when the first companies with a March 31 year-end had to make their transfer pricing adjustments under the rule, which came into effect on April 1 2012.
Before the changes, Mr Joubert says, the secondary adjustment was seen as a deemed dividend and secondary tax on companies (STC) was charged. However, STC was abolished and after much consideration the notion of a deemed loan was introduced.
Even though a company made a transfer pricing adjustment at year-end and paid tax on the difference, SARS considered the overcharge or underpayment as "value distribution" and therefore the difference was considered to be a deemed loan.
It seems the Treasury is going back to the way the rules were applied when STC was still around, even though STC was taxed differently on a technical level, Mr Warneke says.In 2012, the onus was also shifted from SARS to the taxpayer to make the adjustments at year-end where there had been "non-arm’s-length" arrangements, or face a penalty.
Before this, companies engaging in "non-arm’s-length transactions" made no adjustments unless they were caught out by SARS. No penalties applied, and many companies relied on this, probably well aware of the time and effort it took SARS to nail them.
Mr Joubert says if SARS had not assessed a company on the adjustments within three years, the company was often off the hook due to prescription. "SARS had a very heavy burden trying to catch people before the prescription period. In many cases, companies were forced to agree to extend prescription because (SARS) did not have sufficient time to do a proper assessment," says Mr Joubert.
There is no proposed change to this rule in the 2014 budget.
Mr Joubert says companies still have to declare adjustments in their annual tax returns and report them separately as transfer-pricing adjustments. "If you fail to do this and SARS finds out, penalties and interest are automatically triggered," he says. "If SARS catches you three years later, the company will be liable for penalties for underpaying tax in the relevant year, plus interest onwards from the time (the tax was due)."
That makes the exposure calculation a lot scarier.
This article first appeared on bdlive.co.za.