Critical analysis of the components of the transfer pricing provisions contained in Section 31(2) of the Income Tax Act, no 58 of 1962

Van der Westhuysen, Gerdi ; Van Schalkwyk, L. (Stellenbosch : University of Stellenbosch, 2004-12)

Thesis

ENGLISH ABSTRACT: Despite the fact that transfer pricing legislation (i.e. section 31 of the Income Tax Act, 58 of 1962 (“the Act”) has been in force in South Africa since 1995, it has only been in the last three years that the South African Revenue Service (“SARS”) has embarked on a number of assessments of taxpayers’ cross border transactions with foreign group companies. In particular, the SARS targets taxpayers that have rendered cross border services (including financial assistance) to a foreign group company for no consideration and has assessed these taxpayers on the adjusted interest/ fee amounts. Since the burden of proof lies with the taxpayer to demonstrate that its cross border transactions with foreign group companies do not infringe the provisions of section 31(2) of the Act, this study provides taxpayers with guidance as to when its transactions would fall within the scope of application of section 31(2) of the Act and when the SARS would be excluded from applying the provision of section 31(2) of the Act. Following upon a critical analysis of the essential components of section 31(2) of the Act the following conclusions are drawn by the author: • If the taxpayer proves that it did not transact with a connected party (as defined in section 1 of the Act), or it did not supply goods or services in terms of an international agreement (as defined in section 31(1) of the Act), or its transfer price would be regarded as arm’s length, the Commissioner would be excluded from applying the provision of section 31(2) of the Act since all of the components to apply section 31(2) of the Act are not present. • The current view held by the South African Revenue Service and tax practitioners that transactions between a South African company and an offshore company, which are both directly or indirectly held more than fifty percent by an offshore parent company, are transactions between connected persons (as defined in 5 section 1 of the Act) is incorrect in law. Section 31 of the Act is not applicable to such transactions. • The Commissioner will be excluded from making a transfer pricing adjustment to a service provider’s taxable income where the following circumstances are present: o Where the cross border transaction with a connected party does not give rise to gross income, which is the starting point in the determination of taxable income, since the service provider agreed to render services for no consideration and was therefore not entitled to receive income (i.e. no receipt or accrual) and o Where the service provider can provide evidence that demonstrates that there was no practice of price manipulation as regards the transaction under review.

AFRIKAANSE OPSOMMING: Alhoewel oordragprysbeleid wetgewing (artikel 31 van die Inkomstebelastingwet 58 van 1962 (“die Wet”)) al sedert 1995 in Suid Afrika van krag is, het die Suid Afrikaanse Inkomstediens (“SAID”) eers werklik gedurende die laaste drie jaar begin om aanslae ten opsigte van belastingpligtiges se internasionale transaksies met buitelandse groepmaatskappye uit te reik. In die besonder teiken die SAID belastingpligtes wat dienste (insluitend lenings) aan buitelandse groepmaatskappye vir geen vergoeding lewer. Aangesien die bewyslas op die belastingpligtige rus om te bewys dat sy internasionale transaksies met buitelandse groepmaatskappye nie die bepalings van artikel 31(2) van die Wet oortree nie, word belastingpligtiges in hierdie studie van riglyne, wat aandui wanneer transaksies met buitelandse groepmaatskappye binne die omvang van artikel 31(2) van die Wet val asook onder welke omstandighede die SAID verhoed sal word om artikel 31(2) van die Wet toe te pas, voorsien. Na aanleiding van ‘n kritiese analise van die deurslaggewende komponente van artikel 31(2) van die Wet kom die skrywer tot die volgende gevolgtrekkings: • As die belastingpligte kan bewys dat hy nie met ‘n verbonde persoon (soos omskryf in artikel 1 van die Wet) handelgedryf het nie, of dat hy nie goedere of dienste in terme van ‘n internasionale ooreenkoms (soos omskryf in artikel 31(1) van die Wet) gelewer het nie, of dat sy oordragprys as arm lengte beskou kan word, sal die Kommissaris verhoed word om die bepaling van artikel 31(2) van die Wet toe te pas, aangesien al die komponente van artikel 31(2) van die Wet nie teenwoordig is nie. • Die huidige sienswyse van die SAID en belastingpraktisyns dat transaksies wat tussen ‘n Suid Afrikaanse maatskappy en ‘n buitelandse maatskappy plaasvind, waar ‘n buitelandse moedermaatskappy meer as vyftig persent van albei maatskappye se aandeelhouding (direk of indirek) hou, beskou kan word as 7 transaksies tussen verbonde persone (soos omskryf in artikel 1 van die Wet) is regstegnies nie korrek nie. Artikel 31(2) van die Wet is nie van toepassing op sulke transaksies nie. • Die Kommisaris sal onder die volgende omstandighede verhoed word om enige oordragprysaanpassing aan ‘n diensleweraar se belasbare inkomste te maak: o Waar die internasionale transaksie met ‘n verbonde persoon nie bruto inkomste (die beginpunt van ‘n belasbare inkomste berekening) voortbring nie, aangesien die diensleweraar ingestem het om dienste teen geen vergoeding te lewer, wat tot die gevolg het dat die diensleweraar nie geregtig is om inkomste te ontvang nie (dus geen ontvangste of toevalling) en o Waar die diensleweraar kan bewys dat die transaksie nie onderhewig aan prys manipulasie was nie.

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