Whereas SARS may have, for income tax purposes, adjusted the pricing for the supply or acquisition of goods or services to reflect what they regard as an arm’s-length price in respect of a specific transaction, the focus has now shifted to an adjustment of the overall taxable income.In the case of cross-border business restructuring, where, for example, a South African full-fledged distributor is changed into a commissionaire or a low-risk distributor, it may result in a transfer pricing adjustment for South African income tax purposes.Typically, consideration will be given to whether the terms of any revised or renegotiated agreement are comparable with those of independent parties acting at arm’s length and, where any rights were disposed of in the process, whether compensation is required.It must also be considered whether a purported allocation of risks and functions, both pre- and post-restructuring, is not only consistent with the economic substance of the transaction, but also based on a sound commercial rationale.
Where it is argued that the objective of the business restructuring is aligned to the business strategy of the multinational group as a whole, SARS will nevertheless consider if the transaction is based on an arm’s-length price, whether comparable with independent party transactions or not.For example, where it is argued that the South African taxpayer’s profit will be reduced temporarily with the view of earning higher profits in the long term, SARS will typically consider whether:
•Independent parties acting at arm’s length would similarly have been prepared to sacrifice profitability for a corresponding period under the economic circumstances and competitive conditions prevalent at the time.
•The conduct of the parties is consistent with the professed business strategy.
•The nature of the relationship between the parties to the controlled transaction justifies that the taxpayer bears the costs of the business strategy.
•There is a plausible expectation that the business strategy will produce a return sufficient to justify its costs, within a period of time that would be acceptable in an arm’s length arrangement.
In addition to a transfer pricing adjustment, the resultant exportation of assets and/or termination of rights may give rise to a liability for capital gains tax, Secondary Tax on Companies, donations tax and a withholding tax.The transaction should also be compliant with exchange control regulations.
Source: By Carel Cornelissen (TaxTALK)