South Africa released its 2019 budget review in February 20, which outlines several international tax proposals for implementation or evaluation, including a possible change to the Income Tax Act’s transfer pricing rules and adoption of OECD’s model mandatory disclosure.
The “affected transaction” definition relating to the arm’s length transfer pricing rules in the Income Tax Act applies to transactions between connected persons as defined in Section 31 of the Income Tax Act No.58 of 1962 (“ITA”).
The term “affected transaction” is defined in section 31(1) and includes, inter alia, any transaction, operation, scheme, agreement or understanding which has been directly or indirectly entered into or effected between or for the benefit of either or both, inter alia, a resident and a non-resident which are connected persons in respect to each other and where any of the terms or conditions agreed upon are not of an arm’s length nature.
The budget review concludes that the scope of the affected transaction is narrower than “transactions between associated enterprises” used by the OECD in its transfer pricing guideline. Therefore, the government proposes to review the scope of these rules to determine whether the definition in the act should be changed in line with the OECD definition.
If a broad interpretation of associated enterprises is adopted, this could result in a wider application of these transfer pricing rules and may lead to the arm’s-length principle being applied to situations for which it was not intended. Further, the reference to associated enterprises could change the way taxpayers document their international transactions, as the element of ‘control’ would play a far greater role in determining what constitutes an affected transaction.
The budget review further recommends for tax administrative purposes the implementation of the OECD’s model mandatory disclosure rules. The rules require disclosure of information regarding arrangements designed to circumvent the common reporting standard and opaque offshore structures that hide beneficial owners of offshore assets. Similar penalties to those currently in force for noncompliance with the reportable arrangement legislation will be imposed for noncompliance with the rules.
Source: The Government of South Africa
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