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PN 7/1999 Income Tax acT: PracTIce noTes PN 7/1999
can through its own efforts have reasonable access to. The Commissioner does not intend as a matter of course to use publicly undisclosed information in an attempt to substitute an alternative measure of the arm’s length amount. There are procedural problems in using such information, such as the likelihood that such information could not be provided to taxpayers whose transfer prices are under review or as evidence in court due to the secrecy provisions of the Act.
12.3.2 Nevertheless, the Commissioner does not rule out the possibility that publicly undisclosed information will be used in administering the transfer pricing rules.
12.4 Requesting information from foreign connected persons
12.4.1 Where a non-resident parent dictates the transfer price adopted by its South African subsidiary, the parties may not be considered to be dealing at arm’s length. Where the subsidiary has limited or no documentation to demonstrate that its transfer prices comply with the arm’s length principle, it may be necessary to have recourse to documentation held by non-resident connected persons, if the taxpayer’s transfer prices are to be reviewed.
12.4.2 The Commissioner acknowledges that taxpayers may face dif culties obtaining information from foreign connected persons. Such dif culties would not be encountered if taxpayers were required to produce only their own documents. However, due to the relationship between the parties the Commissioner considers it reasonable to expect taxpayers to obtain such information where necessary.
12.5 Acceptability of analyses prepared for a foreign tax administration, global pricing policies and Advance Pricing Agreements (APA’s) entered into with foreign tax jurisdictions
12.5.1 In determining whether an analysis prepared for a foreign tax jurisdiction is likely to be acceptable to the Commissioner, taxpayers should consider the effect of the transfer prices on the South African operations. Whether the analysis results in the most reliable measure of the arm’s length price from the perspective of the South African taxpayer, should also be taken into account.
12.5.2 Most analyses under the accepted pricing methods focus directly on only one side of a transaction (in the case of an analysis prepared for another tax jurisdiction, this is likely to be the foreign party to the transaction). In applying all but the pro t split method, it is not necessary to consider the implications of the transfer price determined for the other party to the transaction.
12.5.3 The Commissioner would expect an arm’s length price to result in a return for the South African operations, commensurate with its economic contribution and risks assumed.
12.5.4 If, for example, an analysis favouring the foreign jurisdiction over South Africa has been prepared (perhaps because the other jurisdiction is more aggressive than South Africa in administering its transfer pricing rules), that analysis is unlikely to be acceptable to the Commissioner. However, if the analysis represents a fair application of the arm’s length principle and from the South African operations’ perspective results in a return that is prima facie commensurate with that operations’ economic contribution and risk assumed, that analysis is more likely to persuade the Commissioner that the transfer prices are arm’s length.
12.6 Transactions with entities in low tax jurisdictions
12.6.1 Taxpayers should be aware that the Commissioner may pay closer attention to a transaction involving an entity resident in a country with lower tax rates than South Africa. The perception exists that transactions involving low tax jurisdictions are often motivated by tax, rather than strictly commercial, reasons.
12.7 General anti-avoidance provisions
12.7.1 Taxpayers should be aware that the exercising of the discretion by the Commissioner in terms of section 31 will not limit or exclude the application of the general anti-avoidance sections contained in the Act.
13 Interest and Penalties
13.1 Penalties
13.1.1 The penalty, additional tax and offence provisions applicable in the event of default or omission in the completion of the tax return or evasion of taxation are contained in sections 75, 76, and 104 of the Act and will also apply to default, evasion or omission relating to transfer pricing. The Act does not impose speci c penalties in respect of non-arm’s length pricing practices.
13.2 Interest
13.2.1 Sections 89 bis and 89quat of the Act provides for interest on the underpayment of tax and will also apply if the underpayment of tax results from non-compliance with section 31 of the Act.
14 Secondary Tax on Companies (STC)
14.1 Section 64C of the Act provides that certain amounts distributed to a recipient by a company are deemed to be a dividend declared by the company. Section 64C (3) (e) deems any amount adjusted or disallowed in terms of section 31 to have been distributed to a recipient by the company. The adjustment will therefore be subject to STC.
14.2 A ‘recipient’ is de ned as any:
• shareholder of the company;
• relative of such shareholder; or
• trust of which the shareholder or relative is a bene ciary.
15 Burden of Proof
15.1 In terms of section 31, the discretion to adjust the consideration in respect of a transaction rests with the Commissioner. In the discharging of its burden of proof it is clearly in a taxpayer’s best interests to:
15.1.1 develop an appropriate transfer pricing policy;
15.1.2 determine the arm’s length amount, as required by section 31; and
15.1.3 voluntarily produce documentation to evidence their analysis.
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