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FAQ - 18 September 2014

17 September 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1.  Letter to the SARB confirming that a transfer pricing policy is acceptable to SARS

Q: We have been approached by a company that requires a letter to be issued to the Reserve Bank (SARB) confirming that the company’s Transfer Pricing policy is acceptable to SARS and the OECD. 

We have a few questions:

  1. Are there any procedures that need to be followed in determining the validity of the policy?
  2. Is there a standard format for such correspondence with SARB?
  3. Is there a guide for transfer pricing?
  4. Where can I find additional guidance in terms of the procedures and requirements before accepting the engagement?
  5. Is there guidance issued by OECD?

Your assistance with regards to the above is once again appreciated.

A: There is no requirement in the Income Tax Act that a transfer pricing policy must be approved by SARS. The only guidance in this regard is found in the Draft Interpretation Note on Section 31: Determination of the Taxable Income of Certain Persons from International Transactions: Thin Capitalisation.  

SARS confirms this when they state (on page 4) that "taxpayers are required to file a return which has been prepared on an arm’s length basis. Accordingly, taxpayers must be able to demonstrate that debt which meets the definition of an affected transaction is at arm’s length or that a tax deduction has not been claimed for the expenditure incurred on the portion of the debt that is not arm’s length.  

In paragraph 8 of that document SARS provides some documentation guidelines.  We copy it below:

The documentation a taxpayer will need to support its arm’s length amount of debt and, if applicable, thin capitalisation adjustment, will vary depending upon the facts and circumstances of the particular case including its size and complexity. However, as a guideline SARS considers that, as appropriate to the particular facts and circumstances, taxpayers should retain the following documentation on their capitalisation position:

  • 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 funding) and the repayment terms.
  • A description of the business (including the type of business, details of the specific business, details regarding the management team and external market conditions) and the plans of the principal trading operations (including the business strategy).
  • Copies of relevant funding agreements and other relevant documents, for example, board minutes relevant to the funding, South African Reserve Bank applications and approvals, copies of related funding applications (for example, where part of the funding is received from an offshore bank).
  • 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 funding transactions; and details regarding principal cash flows and the sources of repayment of debt.
  • A group structure covering all relevant companies and clearly setting out any changes to the structure taking place over the course of the funding transactions.
  • Copies of the financial statements or management accounts just before the point in time the funding is obtained and after the funding transactions.
  • A summary of financial forecasts which are contemporaneous with the funding 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 supporting the borrower’s view of the extent to which the connected party (or supported) debt is considered to be arm’s length.

The only guidance available would be the OECD commentary and guidelines issued in this regard.

2.  Whether a lung disease is a "disability” for purposes of section 18 or 6B of the Income Tax Act and whether medical reports can be submitted to SARS instead of the ITR-DD form

Q: A taxpayer has been diagnosed with emphysema & end stage obstructive lung disease. He was placed on long-term medical leave pending evaluation and eventually declared permanently unfit for work by a medical board. The disability has been documented with full reports in support. Due to the nature this was done by a specialist physician. The physical disability section of the ITR-DD form, however, seems limited to disability of the limbs only.

Are the limitations on the nature of a disability, as per examples on the ITR-DD form, considered indicative or prescriptive by the Commissioner? Section 18(3) of the Income Tax Act lists various areas of disability and the requirements "moderate to severe limitation of daily activities, and the long-term nature thereof”. Must this limited scope be viewed as the ONLY criteria acceptable to the Commissioner in his determination of what constitutes a disability as per section 18(3)(b)? Furthermore, with comprehensive reports on file, is it still compulsory to complete the ITR-DD form?

My interpretation of the law is that "disability" is not as limited in terms of section 18(3) as on the "examples" per the ITR-DD form. The diagnosed condition is significantly more serious than asthma, which is viewed specifically as a chronic condition. Moreover, the condition is irreversible and part of the daily treatment (and significant cost) relates to oxygen therapy. I also believe the medical board decision supports the fact that this condition indeed qualifies as a "disability" as meant by the tax law. Considering the limitations on the ITR-DD form, it seems an unnecessary duplication to re-visit all the diagnostic testing/reports that were previously dealt with. 

Can the taxpayer complete his part of ITR-DD form and annex the medical reports from the specialist physician?

A: Two comments about the qualifying expenditure:

  1. Section 18 (and now also section 6B) refers to "any expenditure that is prescribed by the Commissioner” – this of course would imply if the expenditure is not on the SARS list it will not qualify. The SARS guide explains it as follows: Only expenditure (relating to the actual disability) prescribed by the Commissioner may be claimed as a deduction. These expenses are provided in the List of Qualifying Physical Impairment or Disability Expenditure, 1 March 2012 (see Annexure B). 
  2. The ‘disability’ must be diagnosed by a duly registered medical practitioner in accordance with criteria prescribed by the Commissioner.  The medical practitioner can then only confirm the disability if it falls within SARS’s criteria.  

The response to your first question is therefore that there are in fact ‘limitations on the nature of disability’ and these follow from the ITR-DD form as you say. For each of the impairments in the definition of a "disability”, the Commissioner has prescribed diagnostic criteria. These criteria seek to assess the functional impact of the impairment on a person’s ability to perform daily activities and not the diagnosis of a medical condition. These criteria are discussed in paragraph 9.3 of the SARS Guide on the Determination of Medical Tax Credits and Allowances (Issue 4) – on page 20 and onwards.   

With regard to the Confirmation of Disability (ITR-DD form) SARS states the following:

A person who wishes to claim a medical deduction for disability expenses must complete a Confirmation of Diagnosis of Disability form (ITR-DD), which is available on the SARS website (www.sars.gov.za).The ITR-DD must not be submitted with the annual income tax return, but must be retained for compliance purposes in the event of a SARS audit. The ITR-DD needs to be completed and endorsed by a registered medical practitioner every five years, if the disability is of a more permanent nature. However, if the disability is temporary, the ITR-DD will only be valid for one year, which effectively means that a new ITR-DD must be completed for each year of assessment during which a disability claim is made.

A disability will be regarded as being temporary in nature if that disability is expected to last for less than five years.

Part A of the ITR-DD must be completed for the person with the disability. To ensure that there is no breach of patient-doctor confidentiality, it is important that the authorisation in Part A is duly signed by the person with the disability. The ITR-DD must be signed by a parent, guardian or court-appointed curator, as the case may be, if the person with the disability is a minor, or is physically or mentally incapable of doing so.

Part B of the ITR-DD must be completed by a duly registered medical practitioner who is qualified to express an opinion regarding the person’s disability. The practitioner needs to complete the appropriate diagnostic criteria.

In Part C of the ITR-DD the registered medical practitioner must –

  • indicate and describe if the functional limitations with respect to performing activities of daily living are regarded as either "mild” or "moderate to severe”;
  • indicate if the disability has lasted, or is expected to last for a continuous period of more than 12 months; and
  • sign the declaration.  

We can’t comment on whether or not it is ‘limited to disability of the limbs only’ and that question must be asked of the medical practitioner.  




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