Now that the final regulations relating to country-by-country reporting standards (the CbC Regulations) have been published by the South African Minister of Finance on 23 December 2016, it is important to take stock and consider the CbC Regulations in the context of various other South African developments regarding the implementation of the recommendations contained in the final Action 13 report issued by the Organisation for Economic Cooperation and Development (OECD) on transfer pricing documentation.
Accordingly, we have summarised below the current status of the master file/local file returns that also form part of the OECDs Action 13 report, the Final Notice on Transfer Pricing Record Keeping Requirements, issued by the South African Revenue Service (SARS), as well as the transfer pricing disclosure requirements in the corporate income tax return (ITR14).
The CbC Regulations are, to a large degree, in agreement with the recommendations contained in Action 13, including the CbC Report model template as set out in Annex III.
South African taxpayers that are part of multinational enterprise groups, as defined, need to determine whether they have a filing and/or notification requirement under the CbC Regulations.
In this regard, where the ultimate parent entity of a multinational enterprise group is a South African tax resident and has a consolidated group turnover of more than ZAR10-billion (or, in certain circumstances, EUR750-million), it must file a CbC report with SARS as well as notify SARS of the fact that it is the ultimate parent entity.
A South African member of a multinational enterprise group that is not the ultimate parent entity, or surrogate parent entity appointed to file the CbC report in its jurisdiction on behalf of the ultimate parent entity, must notify SARS of the identity and tax residence of the reporting entity.
SARS is yet to publish a specific form of notification for these purposes. However, the ITR14 already contains questions aimed at establishing the taxpayers ultimate parent entity and consolidated group turnover. We anticipate that the ITR14 will be updated to bring the questions in line with the requirements of the CbC reporting regulations.
The CbC Regulations apply in respect of years of assessments of multinational enterprise groups beginning on or after 1 January 2016. In the case of multinational enterprise groups with a December year end, the regulations would therefore apply to the 2016 year of assessment and the CbC Report, if applicable, would be due by the end of 2017.
Master file/local file
The CbC Regulations, together with the master file and local file form the three-tiered approach suggested in the OECDs Action 13 report, which has been incorporated into the OECD Transfer Pricing Guidelines. These agreed amendments to the OECD Transfer Pricing Guidelines represent the consensus of all countries participating in the OECD/G20 Base Erosion and Profit-Shifting Project, which include the OECD member countries as well as non-member countries, such as South Africa.
In particular, the text of chapter V of the OECD Transfer Pricing Guidelines, dealing with documentation requirements, has been deleted in its entirety and replaced by the content of the Action 13 report together with its annexures, which change was approved by the OECD Council on 23 May 2016.
In terms of the briefing note to the Final Notice, SARS has indicated that master file and local file returns will be required to be submitted under section 25 of the Tax Administration Act, 2011, ie by notice to furnish a return. It is not clear at this stage, however, whether additional legislation specifying the content of these returns will be passed.
The detailed information to be included in the master file and local file as envisaged by the OECD is set out in Annexures I and II, respectively, to the Action 13 report/the revised chapter V of the OECD Guidelines.
Based on the revised chapter V, the master file would contain, inter alia, high-level information regarding the global business operations and transfer pricing policies of a multinational enterprise, while the local file would include, inter alia, detailed transactional transfer pricing documentation specific to each country, identifying material related party transactions, the amounts involved in those transactions, and the companys analysis of the transfer pricing determinations they have made with regard to those transactions.
Therefore, at this stage, the master file/local file return requirements are the only major element of South African transfer pricing documentation requirements that are still outstanding.
Final Notice on Transfer Pricing Record Keeping Requirements
Tax administrations may also impose specific record-keeping requirements in addition to the master file/local file standardised transfer pricing returns. The OECD, however, cautions tax administrations to bear in mind the balance between information needs and the compliance burden that will be placed on taxpayers.
In this regard, on 28 October 2016, the Commissioner released the Final Notice on Transfer Pricing Record Keeping Requirements in terms of section 29 of the Tax Administration Act, setting out the documents required to be kept specifically for transfer pricing purposes.
In terms of the Final Notice, there are two levels of record keeping:
- records in respect of structure and operations a person is required to keep records where the person has entered into a potentially affected transaction, as defined, and the aggregate of the potentially affected transactions for the year of assessment exceeds or is reasonably expected to exceed ZAR100-million.
- records in respect of transactions a person which has entered into a potentially affected transaction, must keep records in respect of any such transaction which exceeds or is reasonably expected to exceed ZAR5-million in value.
The Final Notice will apply to years of assessment commencing on or after 1 October 2016.
Records to be kept in terms of the Final Notice must not be submitted to SARS as a matter of course, but must be available upon request and must be retained for a period of five years.
It appears that SARS is using the ITR14 to gather additional, non-standard information, not required by either the CbC Regulations or the master file/local file content. In this regard, the current version of the ITR14 requires that full details be disclosed as to the cross-border transactions entered into by a taxpayer with connected persons in terms of the revised provisions of section 31 of the Income Tax Act, 1962.
In particular, in respect of transactions with foreign connected persons, the taxpayer must disclose the total number of jurisdictions for each of these transactions, the top five jurisdictions for each of these transactions, together with the transaction value for each of those five top jurisdictions. In respect of transactions with foreign non-connected persons, the same disclosure is required, with the exception that a disclosure of the transaction value of the five top jurisdictions is not required.
The taxpayer is also required to answer a number of questions in relation to, inter alia, documentation and year-end transfer pricing adjustments. In the context of transfer pricing documentation, the taxpayer is asked whether the company has transfer pricing documentation that supports the pricing policy applied to each transaction between the company and the foreign connected person during the year of assessment as being at arms length. It would be hard to answer this question in the affirmative without preparing some form of transfer pricing documentation that consider the arms length nature of the cross-border transactions entered into by the taxpayer with connected persons.
Taking into account the different transfer pricing related documentation requirements set out above, South African taxpayers need to prepare and submit or retain the following information and documentation:
In addition, although local legislation has not yet been implemented to require the submission of the master file/local file returns, we are of the view that taxpayers would be well advised to start considering the information required to prepare these returns, since it is clear that it is SARS intention to issue legislation to this effect in due course.
This article was first published by ENSafrica (www.ENSafrica.com) on 22 February 2017.
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