Some of the new questions are—
- Did the company enter into an affected transaction as defined in s31 where the company: Received/earned foreign income?
- Did the company enter into an affected transaction as defined in s31 where the company: Incurred foreign expenditure?
If the answer to any of the questions is “yes,” then the following questions must be answered—
- Does the company have transfer pricing documentation that supports the pricing policy applied to each transaction between the company and the foreign connected person during the year of assessment as being at arm’s length?
- Did the company conduct any outbound transaction, operation, scheme, agreement for no consideration with a connected person that is tax-resident outside South Africa?
- Did the company transact with a connected person that is tax-resident in a tax haven/low tax jurisdiction?
- Did the company make a year-end adjustment to achieve a guaranteed profit margin?
The new disclosure requirements will require companies to breakdown the following items into domestic / local, foreign-connected, and foreign non-connected, if the answer to certain questions is “yes”—
- Purchase or sale of goods
- Interest payments
- Royalties or license fees
- Administration, management and secretarial fees
- Guarantee fees
- Insurance premiums
- Other finance charges
- Research and development fees
- Other expenses.
Under the new requirements, a company must also supply its debt-to-EBITDA*, interest cover, and debt-to-equity ratios for the new thin capitalisation requirement.
*Earnings before interest, tax, depreciation, and amortisation
Thin capitalisation rules - safe harbor
SARS recently published guidance (a draft interpretation note) which proposes to remove a safe harbour that has, up to now, governed thin capitalisation issues. The safe harbour rule prohibits the deduction of interest paid to a non-resident connected (related) party of a South Africa company, to the extent that the loan exceeded three times the amount of the company’s fixed capital (fixed capital included share capital and retained income subject to certain adjustments).
South Africa’s National Treasury, however, in late April 2013 published new rules relating to the limitations against excessive interest tax deductions, and proposed a potential new safe harbour rule that could apply to cross-border connected-party interest payments and also address thin capitalisation.
Read a May 2013 report prepared by the KPMG member firm in South Africa: 2013 Income tax return for Companies ITR 14: Transfer pricing and thin capitalisation disclosure
Contact a tax professional with KPMG's Global Transfer Pricing Services.