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South Africa: Proposal to amend “affected transaction” definition for transfer pricing purposes

South Africa: Proposal to amend “affected transaction”

The 2020 Draft Taxation Laws Amendment Bill includes a proposed change to the definition of “affected transaction” for transfer pricing purposes.

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The proposed amended definition would be intended to address situations when a tax benefit is indirectly derived by a South African resident as a result of its shareholding in a controlled foreign company (CFC).


Background

Currently, the South African transfer pricing rules apply to a non-arm’s length transaction, operation, scheme, agreement or understanding between the following four categories of parties if they are “connected persons” in relation to each other and the transaction results (or will result) in one of the parties deriving a tax benefit. The four categories of connected persons are:

  • A resident and a non-resident person
  • A non-resident and a resident that has a permanent establishment outside South Africa to which the transaction, operation, scheme, agreement or understanding relates
  • A resident and a non-resident that has a permanent establishment in South Africa to which the transaction, operation, scheme, agreement or understanding relates, or
  • A non-resident and any CFC in relation to a resident

Essentially, the current transfer pricing rules do not apply to a person that is party to a transaction, operation, scheme, agreement or understanding under the last category (a non-resident and any CFC in relation to a resident) when neither the non-resident nor the CFC would be taxable in South Africa, and thus could derive a tax benefit as defined from a non-arm’s length transaction, operation, scheme, agreement or understanding. Only the resident shareholder of the CFC could potentially derive such a tax benefit under the current definition.


Proposed amendment

In order to address the situation noted above, it has been proposed that the transfer pricing legislation be amended to also include a reference to a tax benefit derived by a resident person in relation to the CFC.

The proposed effective date of this amendment is 1 January 2021, and the measure would apply in respect of years of assessment commencing on or after that date.

Read an August 2020 report [PDF 117 KB] prepared by the KPMG member firm in South Africa

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