Page 161 - SAIT Compendium 2016 Volume2

PN 7/1999 Income Tax acT: PracTIce noTes PN 7/1999 15.2 Section 82 of the Act places the burden of proof regarding exemptions, non-liability for tax, deductions or set-
offs on the taxpayer.
16 Advance Pricing Agreements (APA’s)
16.1 APA’s are described in detail in the OECD Guidelines. In short, this is a process whereby the setting of transfer prices in respect of controlled transactions may be agreed with tax administrators in advance of the transactions being undertaken and reported.
16.2 Due to various factors, the APA process will not in the foreseeable future, be made available to South African taxpayers. This Practice Note will thus not deal with APA’s.
17 Intangible Property
17.1 Chapter VI of the OECD Guidelines deals speci cally with intangible property. The Commissioner considers the guidance provided in that chapter relevant and recommends that taxpayers follow the guidance in establishing arm’s length conditions in international agreements with connected persons involving intangible property.
18 Intra-group Services
18.1 Chapter VII of the OECD Guidelines deals speci cally with intra-group services. The Commissioner considers the guidance provided in that chapter relevant and recommends that taxpayers follow the guidance in establishing arm’s length conditions in international agreements with connected persons involving intra-group services.
19 Cost Contribution Arrangements
19.1 Chapter VIII of the OECD Guidelines deals speci cally with cost contribution arrangements. The Commissioner considers the guidance provided in that chapter relevant and recommends that taxpayers follow the guidance in establishing arm’s length conditions in international agreements with connected persons involving cost contribution arrangements.
20 Effective Date
20.1 The provisions of section 31 apply only to goods and services supplied on or after 19 July 1995. This Practice Note applies in respect of such goods or services.
21 Conclusion
21.1 Taxpayers should make conscientious efforts to establish transfer prices that comply with the arm’s length principle and prepare documentation to evidence that compliance.
21.2 Where such steps have been taken the Commissioner is likely to determine prima facie that the taxpayers’ transfer pricing practices represent a lower tax risk and that the possibility of an in depth review of those practices is likely to be diminished accordingly. In contrast, taxpayers who give inadequate consideration to their transfer pricing practices are likely to receive greater scrutiny from the Commissioner.
21.3 The following is a summary of the broad guidelines suggested:
• establish economic justi cation before the transaction is entered into;
• be satis ed that the consideration is an arm’s length consideration;
• prepare and retain contemporaneous documentation to support the above matters and the assessment of
market conditions at the time when the pricing decisions were made;
• justify the choice of method; and
• establish and consistently follow a systematic process for setting arm’s length international transfer prices.
ANNEXURE A CHARACTERISTICS OF A FUNCTIONAL ANALYSIS
1 Introduction
1.1 A taxpayer’s main aim in determining and documenting its transfer prices should be to convince the Commissioner that its transfer prices are arm’s length. A functional analysis can serve two important purposes in this regard:
1.2 Firstly, the functional analysis should provide a quick overview of the organisation for those evaluating the transfer
pricing policy of the multinational, to assist them in familiarising themselves with the general operations of the multinational. Secondly, the functional analysis should seek to identify the functions performed by each member of the multinational and assess the importance of each function to the overall operations of the multinational.
2 Outline of the Multinational’s Operations
2.1 The overview of the multinational will outline the overall structure and nature of the business undertaken by a multinational. Some internal documentation, such as organisational charts, may be useful in this regard.
2.2 General commercial and industry conditions affecting the multinational may also be relevant.
Such conditions could include information such as:
(a) an explanation of the current business environment and its forecasted changes; and
(b) how forecasted incidents in uence the multinational’s industry, market scale, competitive conditions, regulatory framework, technological progress and foreign exchange market.
2.3 The multinational itself is not necessarily the only source of such information. Trade associations, for example, may publish trade journals or other documents, or may have conducted studies of the market, or have access to industry experts, which may provide valuable information.
Competitors and academics may also provide useful information for describing the environment in which the multinational operates.
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