The ramping-up of country-by-country (CbC) reporting to regulate transfer pricing and combat cross-border Base Erosion and Profit Shifting, heralds a new global tax landscape. It makes for different demands by tax authorities worldwide and requires the provision of information at a much finer level of detail. As a result, the risks associated with transfer pricing rises significantly and companies need to strategically manage this new policy environment, especially given that the first CbC reports were required to be filed with SARS from 31 December 2017.
The Organisation for Economic Co-operation and Development’s (OECD) base-erosion and profit shifting (BEPS) policies apply in South Africa through the SARS regulations issued by the Minister of Finance (section 257 of the Tax Administration Act). The regulations impact the ultimate parent entity of a multinational enterprise that is South African tax resident and has a consolidated group turnover of more than R10 billion, and requires filing of a CbC report with SARS. South African tax resident multinational enterprises with potentially affected transactions for a year of assessment (without offsetting any potentially affected transactions against one another) that exceed or are reasonably expected to exceed R100 million, must also provide documentation which support that transactions are entered into at arm’s-length. Additional documentation should also be submitted for any potentially affected transaction that exceeds or is reasonably expected to exceed R5 million in value.
The implications of the new transfer pricing rules are worth bearing in mind. The focus on goods and services has been revised, to place greater emphasis on cross-border transactions, operations, schemes, agreements or understandings. Under these conditions, SARS may impose transfer pricing adjustments if, firstly, terms or conditions are imposed on transactions, operations or schemes that differ from terms and conditions that would have existed between independent persons acting at arm’s length and, secondly, if the difference confers a South African tax benefit on one of the parties. Another implication of the transfer pricing legislation (section 31(3) of the Income Tax Act) is that an adjustment of a transaction is deemed to be a dividend in specie and subject to a 20% withholding tax. The Act contains exclusions in respect of non-resident persons who grant financial assistance to a headquarter company and the headquarter company directly applies the financial assistance to any foreign company in which the headquarter company holds at least 10% of the equity shares and voting rights. If a non-resident grants the use of intangible property (“IP”) to the headquarter company, the transfer pricing provisions do not apply to the royalty paid by the headquarter company to the extent that the headquarter company gives the use of the IP to a foreign company in which the headquarter company holds at least 10% of the equity shares and voting rights. The royalty paid by the foreign company to the headquarter company is also not subject to the transfer pricing provisions.
The CbC reporting requirements follow a three-tiered approach. They require the compilation of a standardised Master File, with a high-level overview of the multinational group business. A Local File should contain detailed information on specific group transactions. And, the CbC report should contain aggregate, jurisdiction-wide information on the global allocation of the enterprise’s income, taxes paid, indicators of economic activity. The CbC report enables tax authorities to make a BEPS risk assessment of the company. Once filed with SARS, the CbC reports will be shared with 31 different tax authorities. In terms of the OECD principles, SARS may only use the CbC report to assess transfer pricing and BEPS risks, and to perform economic and statistical analysis.
Rising to the compliance challenges of the new Country-by-Country reporting environment will require co-operation between companies, tax specialists and tax authorities.