Is transfer pricing applicable to a foreign head office providing funding to its local branch?
05 February 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: I have a local client which is a branch of a
foreign entity. It receives funding from the foreign entity and from other
foreign group entities. The branch is registered for income tax here due to its
operations; the holding company does not have any other presence in South
Would we fall into the ambit of section 31 of the
Income Tax Act (ITA), as we are non-residents receiving funding from another
non-resident (being the holding company or alternatively another foreign group
company, not a CFC)?
A: The definition of "affected transaction” in section
31(1) ITA does not include a transaction between a non-resident and its local
SA branch as legally a branch and its parent are the same entity. In practice
(See PN 7 (1999) as attached) SARS have indicated that they will use the
principles in section 31 of the ITA to ensure that profits attributable to the
local SA branch have been properly and fully attributed in terms of any treaty
provisions, thus ensuring that profit extraction does not occur through pricing
that it not arm’s length in nature.
Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.