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Is transfer pricing applicable to a foreign head office providing funding to its local branch?

05 February 2015   (0 Comments)
Posted by: Author: SAIT Technical
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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 Africa.

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.

http://www.sars.gov.za/AllDocs/LegalDoclib/Notes/LAPD-IntR-PrN-2012-11%20-%20Income%20Tax%20Practice%20Note%207%20of%201999.pdf

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.


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