The term Secondary Adjustment is explained as follows in the Organisation for Economic Co-operation and development’s Transfer Pricing Guidelines:
“To make the actual allocation of profits consistent with the primary transfer pricing adjustment, some countries having proposed a transfer pricing adjustment will assert under their domestic legislation a constructive transaction (a secondary transaction), whereby the excess profits resulting from a primary adjustment are treated as having been transferred in some other form and taxed accordingly. Ordinarily, the secondary transactions will take the form of constructive dividends, constructive equity contributions, or constructive loans.”
From the introduction of transfer pricing legislation in South Africa in 1995 until 2012, a secondary adjustment was made in the form of a deemed dividend. With the introduction of Dividends Tax – which replaces Secondary Tax on Companies in 2012 for years of assessment commencing on or after 1 April 2012 – the law changed. Secondary adjustments have since 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.
Following the Minister of Finance’s announcement in this year’s Budget Speech, it has now been proposed that from 1 January 2015 the secondary adjustment be in the form of a deemed dividend paid by the resident and consisting of a distribution in specie.
Should you require any assistance regarding any transfer pricing related matters, or wish to discuss the above, please contact one of the members of our transfer pricing team in South Africa.