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The New ITR14 Corporate Income Tax Return Targets Transfer Pricing

Wednesday, 03 July 2013   (0 Comments)
Posted by: Author: Tarryn Spearman
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Author: Tarryn Spearman (Grant Thornton)

On 4 May 2013 SARS introduced an enhanced Income Tax Return for Companies (ITR14) as part of the modernisation of Corporate Income Tax (CIT), aimed at improving efficiency and compliance. The new ITR14 provides SARS with useful information regarding companies’ transfer pricing related activities, which will allow them to select cases for audit more easily and efficiently.

Tell SARS more

If companies have an IT14 or IT14SD in the old format which was not submitted by 4 May 2013, they are now required to complete the new ITR14 for submission. However be warned that the new form requires significantly more mandatory information, especially in the area of related party transactions.

In cases where a taxpayer selects yes to these questions, the new ITR14 requires detailed information about these ‘affected transactions’:

  • "Did the company enter into an affected transaction as defined in s31 where the company: Received / earned foreign income?” or
  • "Did the company enter into an affected transaction as defined in s31 where the company: Incurred foreign expenditure?”

If a taxpayer answers yes to these questions, the ITR14 requires information about the extent of transfer pricing supporting documentation prepared by taxpayers as follows:

Taxpayers must further disclose the value of cross-border international related party and third party transactions as well as the value of domestic related party transactions. It appears that SARS is taking a transactional approach to managing all related party transactions because there are separate fields for the most common related party transactions e.g. sale of goods, interest received/receivable, royalties/license fees received/receivable, admin fees received/receivable etc.

On a practical note, a number of aspects of these transfer pricing questions are either easily misunderstood or still require clarification from SARS. These could lead to unintentional incorrect disclosures and we suggest that you contact us should these questions apply to you and you need to file your tax return in the coming weeks.

Thin capitalisation 

The ITR14 now requires taxpayers to disclose various financial ratios (debt: equity; debt: EBITDA; EBITDA: interest paid) and the draft thin capitalisation practice note states that SARS will be using these ratios as risk indicators. Should these ratios exceed 3:1, companies are at risk of being considered to be too thinly capitalised. This clearly proves SARS are intensifying it focus on transfer pricing, as highlighted in the 2012 and 2013 Budget speeches.

Best practice

With the increased disclosure requirements, it is now even more important that taxpayers consider whether their related party transactions meet the required ‘arm’s length’ standard. In cases where non-arm’s length pricing is disclosed on tax returns, taxpayers are at risk that SARS will investigate further.

It is highly recommended that taxpayers who are engaging in a significant amount of related party transactions or where material values are concerned, document their intercompany pricing policies in a robust transfer pricing document which is updated regularly and is available for SARS’ scrutiny.

…and if taxpayers don’t comply?

From 1 April 2012, where an arm’s length relationship cannot be demonstrated, the transfer pricing adjusts will give rise to a deemed loan by the South African entity to the foreign related party. The South African entity will therefore be subject to tax on the interest resulting from the loan.

Ordinary penalties will apply to non-compliant taxpayers, i.e. up to 200% of unpaid tax for material non-disclosure and tax evasion. Interest is charged on any amount of underpaid tax at the prescribed rate (currently 8.5%).

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