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Punitive proposed amendment to South Africa’s transfer pricing provisions

Wednesday, 03 October 2018   (0 Comments)
Posted by: Authors: Jens Brodbeck & others
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Authors: Jens Brodbeck, Jo-Paula Roman, Megan McCormack and Scott Salusbury (ENSafrica)

Transfer pricing is a self-assessment mechanism that aims to ensure that taxpayers identify all potential cross-border transactions, operations, schemes, agreements or understandings that have been entered into between connected persons (referred to as “potentially affected transactions”), to ensure that all such potentially affected transactions have been concluded and implemented on an arm’s length basis. 

Ideally, where a taxpayer has been a participant to a potentially affected transaction, the taxpayer would ensure upfront that the potentially affected transaction has actually been concluded and implemented on an arm’s length basis. 

However, where the terms and conditions of that potentially affected transaction differ from those that would have existed at arm’s length, the taxpayer is required, in terms of section 31(2) of the Income Tax Act, 1962 (“Income Tax Act”), to calculate its taxable income as if the terms and conditions of the potentially affected transaction had been arm’s length. To the extent that this results in a difference in taxable income, this amount is typically referred to as the “primary adjustment”.  

Furthermore, in terms of section 31(3) of the Income Tax Act, if the taxpayer is a company, and subject to certain exceptions, the amount of the primary adjustment is deemed to be a distribution of a dividend in specie declared and paid by the taxpayer. Where the taxpayer is a person other than a company, the amount of the primary adjustment is deemed to be a donation. This re-characterisation is referred to as the “secondary adjustment”. 

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