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South Africa: Transfer pricing measures in budget 2020-2021

South Africa: Transfer pricing measures in budget

The national budget for 2020-2021 was presented on 26 February 2020, and includes measures concerning transfer pricing and cross-border taxation rules.


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The budget proposes a significant change to the interest limitation provisions in respect of cross-border loans, introduced for years of assessment commencing on or after 1 January 2021. The proposed changes are broadly set out in a discussion document, Reviewing the Tax Treatment of Excessive Debt Financing, Interest Deductions and Other Financial Payments, released for public comment on 26 February 2020.

The proposed regime would clarify that transfer pricing rules are to apply before the interest limitation rules. The proposal would apply to total (external and internal) interest expenditure, as well as to payments economically equivalent to interest (currently the limitation only applies to interest paid to creditors in a “controlling relationship” to the debtor). The deduction would be limited to 30% of taxable income for the year before interest, capital allowances, and imputed controlled foreign company (CFC) income (often referred to as “tax EBITDA”).

Currently, interest up to approximately 43% (depending on the average repo rate) of tax EBITDA is allowed as a tax deduction, so the proposed change would represent a significant decrease in the allowable deduction. Provision would be made for a de minimis rule and for the carry forward of interest that has been disallowed for a period of five years.

South African dividends received by a CFC in relation to a South African resident individual or trust would no longer qualify for a full exemption, and would be subject to 20% dividends tax (in line with what the treatment would have been if the South African individual / trust had received the dividend directly).

For capital gains tax purposes, the participation exemption in respect of gains on the disposal of shares in foreign companies would no longer apply if the value of those shares is attributable to South African assets.

The transfer pricing rules would be amended in order to address a scenario when a transaction is between a CFC and a non-resident connected person. Currently, the transfer pricing rules do not consider the tax benefit derived by a South African resident shareholder of a CFC by virtue of a lesser imputed amount arising from such transactions.

Read a February 2020 report [PDF 135 KB] prepared by the KPMG member firm in South Africa

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