New requirement for long term loan exemptions from transfer pricing provisions
The current transfer pricing rules contained in section 31 of the Income Tax Act require the taxable income of a resident, which is party to an ‘affected transaction’, to be calculated as if the relevant transaction had been entered into on terms and conditions that would have existed between independent persons dealing at arm’s length (to the extent that a party to the ‘affected transaction’ derives a tax benefit).
Any difference between the resulting taxable income of a party, and the taxable income of a party calculated without reference to the provisions of section 31, is currently treated as a deemed loan which constitutes an affected transaction. Such deemed loans have proved problematic in practice, particularly as there is no effective way to repay these loans. It is proposed that with effect from 1 January 2015, any difference arising will instead be deemed to be a dividend paid by that resident consisting of a distribution of an asset in specie. The dividend deemed to be paid will accordingly be subject to dividends tax, payable by the resident. Deemed loans that arose under the previous legislation will continue and will not be converted to deemed dividends.
The provisions in section 31(7), which relate to an exemption from the transfer pricing rules in relation to long-term cross-border loans provided by residents, are proposed to be amended with the addition of a new requirement for the exemption. The additional requirement proposed is that no interest may have accrued in respect of the loan during the relevant year of assessment.
No effective date for this amendment is given in the draft legislation.
By
- Webber Wentzel
- South Africa
