In general, a “secondary adjustment” refers to a constructive transaction (a secondary transaction), whereby excess profits resulting from a primary adjustment are treated as having been transferred in some other form and taxed accordingly.
Ordinarily, secondary transactions take the form of constructive dividends, constructive equity contributions or constructive loans.
South Africa’s current treatment
From 1995 (with the introduction of transfer pricing legislation in South Africa) until 2012, a secondary adjustment was made in the form of a deemed dividend.
With the introduction of the “dividends tax” (which replaced the “secondary tax on companies” for years of assessment beginning on or after 1 April 2012), secondary adjustments have been in the form of a “deemed loan” by the South African resident in respect of which the taxpayer is deemed to have accrued arm’s length interest, subject to South African tax.
However, the concept of the “deemed loan” caused uncertainty as well as tax exchange control and accounting problems.
New rule from 1 January 2015
Following the Minister of Finance’s announcement in this year’s Budget Speech, it has now been proposed that effective from 1 January 2015, the secondary adjustment would be in the form of a deemed dividend paid by the resident and consisting of a distribution in specie.
Read an August 2014 report prepared by the KPMG member firm in South Africa: Additional changes made to SA’s transfer pricing legislation
Contact a tax professional with KPMG's Global Transfer Pricing Services.