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Tax Developments in South Africa John Stanley and Cicelia Potgieter of Deloitte & Touche Outline Some Recent Changes in Taxation in South Africa

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Tax Developments in South Africa John Stanley and Cicelia Potgieter of Deloitte & Touche Outline Some Recent Changes in Taxation in South Africa INTERNATIONAL South Africa Tax developments in South Africa John Stanley and Cicelia Potgieter of Deloitte & Touche outline some recent changes in taxation in South Africa. The Income Tax Act does not impose contemporaneous documentation to Transfer pricing specific penalties for non-arm’s length support transfer prices. The practice ransfer pricing legislation was pricing principles. Due to the subjective note will be applied retrospectively and introduced in South Africa in nature of transfer pricing adjustments, SARS will expect documentation in T1995, mainly due to relaxation of general penalty provisions could be too respect of all transactions entered into exchange controls and the country’s re- harsh. Other countries have introduced from July 1995. For future transactions, emergence into international trading specific penalty provisions to address documentation should be prepared no when sanctions ended. Since then, the the subjectivity of the adjustments. later than the date of submission of a South African Revenue Services (SARS) The acceptable methods are: compa- tax return affected by these transactions. has not really policed compliance, but is rable uncontrolled price, resale price, starting to focus more of its resources on cost plus, profit split and transactional A good introduction legislation and a practice note was net margin method. The method that is The practice note is a good introduction issued in August 1999. Taxpayers who finally used, should be the one with the to transfer pricing. Other countries start- ignore transfer pricing arrangements most reliable results and that requires ed with broad introductory guidelines could risk significant tax adjustments. the least and most reliable adjustments. followed by specific ones. South African SARS is also in the process of estab- The aim should be for consistent appli- taxpayers will have to see whether SARS lishing a transfer pricing investigation cation worldwide. When different meth- will issue further practice notes on topics unit to police compliance. Taxpayers ods are applied from country to country such as the application of transfer pric- who ignore it may soon find themselves or the application of the methods differs ing, financial services, intra-group serv- faced not only with further income tax, significantly, a multinational may be at ices, intangibles and documentation. I but also penalties (up to 200% of under- risk of double taxation. SARS, in line paid taxes) and interest. On top of this, with the OECD guidelines, prefers the John Stanley is a partner in the tax a company is potentially exposed to transactional methods over the profit division at Deloitte & Touche. Secondary Tax on Companies, currently methods and, as a general rule, prefers at a rate of 12.5%. the comparable uncontrolled price Cicelia Potgieter is a senior manager in method. the tax division at Deloitte & Touche. Tax treaties signed Taxpayers are being urged to prepare During 1999 tax treaties were signed with the following: Foreign tax credits G Australia G Italy hen taxpayers are liable to amended to clarify that such a credit is G Namibia (re-negotiated) taxation in South Africa and also available when the income relat- G Pakistan Wa foreign country on income ing to services rendered outside South G Slovak Republic derived from a source outside South Africa is deemed to accrue to taxpay- G Tunisia. Africa, they are entitled to a rebate, or ers from a source within South Africa, Treaty provisions will apply to South credit, equal to the foreign taxes paid. which income would therefore be sub- I Africa, from 1 January, 2000. I The Income Tax Act has been ject to tax in South Africa. Foreign investment income here a South African resident holds more than 50% subject to a number of exemptions. One such exemption is of the rights to participate in the capital or profits, or where the foreign tax paid or payable is more than 85% of Wexercises more than 50% of the votes or control, of the South African tax payable. A recent change to the Income a foreign company, that foreign company will constitute a Tax Act now makes it clear that the 85% will be determined controlled foreign entity (CFE) of the South African resident. on the basis of the amount of any taxes paid or payable with- Any annuity, interest, rental or royalty income earned by the out any right of recovery by any person. The change was CFE will be subject to South African tax in the hands of the effected to counter a loophole in situations where a country’s South African resident in proportion to its participation rights, tax legislation allowed for a refund of the foreign tax paid. I The Treasurer – February 2000 61.
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