Transfer pricing documentation requirements due to change
21 January 2015
The Davis Committee has made certain recommendations relating to transfer pricing and documentation in its report on the OECD's Base Erosion and Profit Shifting (BEPS) Action Plan. We are aware that the current transfer pricing practical guidelines, as contained in SARS' Practice Note 7 (PN7), are not that clear and are based on outdated publications. The Davis Committee confirms that PN7 should be updated and revised to reflect recent developments. At least one legally Binding General Ruling should be enacted on section 31 of the Income Tax Act.
According to PN7, the preparation of transfer pricing documentation is currently not compulsory in South Africa. However, as per the amended version of section 31(2) of the Income Tax Act, which states that the onus is on the taxpayer to make any transfer pricing adjustment, it is however recommended to have transfer pricing documents in order to make this adjustment should it be deemed necessary.
The Davis Commission accordingly recommends that documentation requirements should be introduced in line with the three-tier structure of BEPS, consisting of a master file, a local file and country-by-country reporting. It should only be compulsory for large multinational businesses with a group turnover in excess of ZAR1 billion to prepare all three reports in the interest of compliance cost requirements. Smaller companies should be in the position to produce documentation and information on the specific request of the tax administration.
SARS should take all reasonable steps possible to ensure that there is no public disclosure of confidential information. Clarity is required on the time frame allowed to taxpayers for the preparation of the documentation and its retention. Documentation (master-file, local file and country-by-country report) should be updated annually and benchmarking studies every three years.
The Davis Committee suggests that SARS needs to establish a highly skilled transfer pricing team to include lawyers, accountants, business analysts and economists. The IT14 tax return needs to be improved, so that timely decisions on tax assessment can be made. Collection and sharing of data should be extended to other holders of vital information, such as exchange control information collected by the South African Reserve Bank.
Taxpayers must expect changes to the way transfer pricing is being regulated. Documentation will be even more important in justifying compliance with the arm's length principle.