Page 157 - SAIT Compendium 2016 Volume2

PN 7/1999 Income Tax acT: PracTIce noTes PN 7/1999
11.5 Use of multiple year data
11.5.1 In order to obtain a complete understanding of the facts and circumstances surrounding the controlled transaction, it would be useful to examine data from the year under examination as well as prior years.
11.5.2 In the case of both the tested party and the uncontrolled comparables, multiple year data should be used, to take account of the effect of product and business cycles and short-term economic conditions.
11.6 Con rming transfer prices through multiple methods
11.6.1 There are conceptual links between each of the transfer pricing methods. This means that there should be a general consistency between transfer prices determined under each of the methods.
11.6.2 One of the taxpayer’s key aims in transfer pricing should be to convince the Commissioner that its transfer prices are set at arm’s length. To this end, a taxpayer’s transfer pricing practices may be more credible if they are supported by analyses under one or more secondary methods. However, in accordance with paragraph 1.69 of the OECD Guidelines the Commissioner does not as a rule require the application of more than one method, as this could place a signi cant burden on taxpayers.
11.6.3 A taxpayer need not go to the same level of detail to demonstrate a price under more than one method. A brief analysis under one or more alternative methods that supports a well established and documented transfer pricing policy, determined under a primary pricing method, will add further credibility to that transfer pricing policy.
11.6.4 The decision to apply more than one method will depend on circumstances such as the availability and reliability of comparables and the taxpayer’s assessment of the risk and degree of security required in its transfer pricing policies. The complexities of real life business situations may also force a taxpayer to apply more than one method, or even a mixture of methods, to determine an arm’s length price. Therefore, the use of more than one method will be justi ed in the case of very complicated transactions.
11.7 Materiality in a practical assessment of comparability
11.7.1 The determination of an arm’s length price is a practical exercise and should not deal with immaterial differences.
11.7.2 The purpose of a functional analysis is to understand the qualitative nature of the functions, assets and risks, to facilitate a comparison with other enterprises with similar functions, assets and risks. Allocating actual income to speci c functions, assets and risks may lead to unnecessary complexities in analysis.
11.7.3 Instead, many factors should be assessed as part of the business risks and comparisons made based on those factors. The application of the transfer pricing methods is ultimately concerned with creating an analysis that is capable of producing a quanti able result. Some factors that cannot be quanti ed may need to be addressed indirectly instead.
11.8 Interest-free loans to non-residents
Residents of the Republic making loans to non-resident individuals, trusts or companies often charge no interest on the loans and no repayment conditions are agreed upon. In exercising his discretion in terms of section 31 (2) to adjust the consideration in respect of the granting of the nancial assistance, the Commissioner will take into account the amount of income of the non-resident which is taxed in the Republic in terms of the provisions of section 9D, the impact of the transaction on the tax base of any of the taxes imposed under any of the Acts administered by the Commissioner, the business activities of the non-resident and the ruling interest rates in the Republic as well as the country of residence of the non-resident who/which borrowed the funds.
11.9 Losses incurred by a member of a multinational
11.9.1 If a taxpayer is incurring losses when any of the members of the multinational which has an interest in the goods provided or services rendered, are pro table, it may imply that this entity is not receiving adequate compensation from the multinational of which it is part in relation to the bene ts derived by that group from its activities. The following may be legitimate reasons for incurring losses:
(a) huge start-up costs
(b) unfavourable economic conditions
(c) inef ciencies
(d) temporary strategic decisions
However, independent enterprises would not be prepared to tolerate losses that continue for an extended period of time. Since the extent to and conditions in terms of which losses will be tolerated by independent parties is the benchmark in setting and evaluating transfer prices, prices that result in losses should be compared to what comparable independent parties would accept in similar circumstances.
11.10 Recognition of actual transactions undertaken
11.10.1 As a general point of departure an examination of controlled transactions will be based on the transactions actually undertaken by the connected persons.
11.10.2 In accordance with paragraph 1.37 of the OECD Guidelines it will, in certain circumstances, be appropriate to disregard the structure of the controlled transaction entered into by a taxpayer. This will be the case where the economic substance of a transaction differs from its form. The Commissioner will, therefore, evaluate the substance of actual transactions to determine whether the transactions were structured in a way that would never have taken place between independent enterprises. An arm’s length price should re ect the actual functions performed, risk assumed and assets used.
11.10.3 In terms of paragraph 1.37 above, the structure adopted by a taxpayer may also be disregarded where the form and substance of the transaction agree, but viewed in their totality, the arrangements made in relation to the transaction differ from those which would have been adopted by unconnected persons behaving in a commercially rational manner and the actual structure impedes the Commissioner from determining the appropriate transfer price.
11.11 Evaluation of separate and combined transactions
11.11.1 Ideally, to arrive at the most precise approximation of fair market value, the arm’s length principle should be applied on a transaction-by-transaction basis. However, there are often situations where separate transactions are
SAIT CompendIum oF TAx LegISLATIon VoLume 2 149