Mandatory Transfer Pricing Documentation

Transfer pricing is the setting of the price for goods and services between individual entities of a larger multi-entity firm. Thus, if a subsidiary company sells goods to a parent company, the cost of those goods for the parent company is the transfer price.

This pricing system must accord with the arm’s length principle, otherwise it could be classified as tax avoidance which carries penalties from the South African Revenue Services (SARS). It is furthermore important to understand the laws governing transfer pricing, as the penalties and interest associated with the contravention of such laws or rules can be backdated to 1995 when the rules on transfer pricing were established.

SARS has issued a draft Public Notice on 15 December 2015 which establishes additional record-keeping requirements for transfer pricing transactions.

The draft Notice defines “consolidated South African turnover” as “the total consolidated turnover of a group that is subject to normal tax in the Republic.”

For taxpayers with a consolidated South African turnover of R1 billion and above, the draft Notice sets out a broad list of documents which needs to be retained by the Company, as set out in the schedule to the draft. Taxpayers below the R1 billion threshold have less onerous requirements, but is likely to cause uncertainty as it states that documents must be kept to prove that “potentially affected transactions” were conducted at arm’s length.

The term “potentially affected transactions” is a new term and is defined in the draft Notice to suggest that all cross-border transactions with connected persons must be dealt with in the transfer pricing documentation.

It is thus imperative that you retain transfer pricing documents, even if you are below the R1 billion threshold, as the schedule provides clear guidelines but below threshold taxpayers will need to gauge which documents to keep to avoid SARS issuing penalties.

The Draft Notice can be found on SARS’ website.

Article by Alida Hendrikse (BCom LLB | Admitted Attorney) | C2M Compliance Administrator.

Comments adapted from an article published online by Okkie Kellerman from ENS Africa.

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