Transfer Pricing compliance requirements in South Africa have been significantly tightened and a modern transfer pricing system, including electronic transfer pricing return submission, has been put in place.
Will this have an impact on tax collection for the current financial year?
The new Finance Minister, Tito Mboweni, was sworn in barely three weeks prior to the delivery of the 2018 , which is due on 24 October 2018. Mboweni previously impressed as the 8th Governor of the South African Reserve Bank from 1999 until the end of 2005. He is an economist and has broad practical experience, and many have said he was the best suited candidate to become Finance Minister.
Despite all his practical as well as theoretic knowledge and experience, Minister Mboweni is facing a tough task when delivering this year’s MTBPS. The South African economic environment is at a low, government spending is required in various sectors and areas, and it would appear that revenue collection mechanisms are maximised. Given the relatively high tax levels in South Africa and the widely raised perception that the money collected is not used in a manner beneficial to the broader public, some are even predicting or at least cautioning of a tax revolt.
During 2017/2018, South Africa experienced a decline in tax revenue collection in that collections stayed below the already downwards adjusted revised target.
This can be attributed to a weak economy, the impact of currency fluctuations, restructuring at the South African Revenue Service (SARS) and political developments. At the same time, however, mechanisms developed as part of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative, for example, stricter and more disclosure-focused transfer pricing documentation requirements were rolled out across the world and in South Africa.
The mid- to long-term effect of this is expected to result in increased tax collections.
Against this backdrop, new transfer pricing documentation requirements were introduced in South Africa for years of assessment commencing on or after as early as 1 January 2016, and electronic transfer pricing return filings for the vast majority of taxpayers affected are due within the current budget term.
This means that SARS has been receiving pertinent financial information on transfer pricing related activity by multinational groups in and with South Africa.
Bi- or multilateral exchange of information agreements such as the Multilateral Competent Authority Agreement for the exchange of Country-by-Country Reports are to ensure transparency and disclosure across the globe.
This information is, as per the intention communicated by the OECD, designed to be used by tax administrations for transfer pricing risk assessment purposes. Following risk assessment and potential audit an indirect effect of this exchange of information may be additional tax revenue through transfer pricing adjustments. However, the impact of this would be seen in the future.
New transfer pricing documentation requirements’ main focus is on broader compliance with documentation requirements which enable taxpayers to adjust their pricing to ensure arm’s length profits and therefore potentially increased tax revenues in South Africa.
The increased transfer pricing compliance is expected to result in additional tax revenue, but this would be generated over time, probably only after this fiscal year. It is also questionable if increased transfer pricing compliance and enforcement would yield significant (sufficient) tax revenues going forward. Most South African large multinational taxpayers have been complying with transfer pricing requirements and central transfer pricing teams have ensured compliance.
An interesting observation, however, relates to recent developments in South Africa in terms of which SARS has communicated its intention to penalise non-compliant taxpayers.
The late submission of corporate tax returns, so far this was not subject to any penalties, has been pointed out in particular as an area where SARS will enforce penalty provision going forward. Additionally, non-compliance penalties have already been introduced in respect of the new transfer pricing documentation return filings. Penalties may be levied of up to R16,000 per return outstanding, per month.
This could certainly lead to additional income for SARS.
Transfer pricing requirements have been enhanced in South Africa and therefore an increase in tax collections from South African members of multinational entities is expected in the mid-term. However, significant additional collections should not be expected.
This is because most large multinational taxpayers are already taking transfer pricing compliance seriously and the current economic climate has had a negative impact on companies’ financial results, which then minimises any taxable profits. The enforcement of penalty provisions, however, may result in additional revenue income.
Thus, unfortunately, it would appear that transfer pricing (and other direct tax areas) may not be suitable to help increase state income in the medium-term and the Finance Minister would need to consider alternatives.