South Africa: Transfer pricing adjustments and implications for VAT purposes

While transfer pricing adjustments affect the profitability of companies, taxpayers also need to consider potential implications for VAT purposes.

Transfer pricing adjustments affect the profitability of companies

Intergroup transactions across jurisdictions are, under the OECD Transfer Pricing Guidelines, to be valued at arm’s length prices, and this often necessitates adjustments to the values of the initial cross-border transactions.

Transfer pricing adjustments are usually done at year-end and may be prospective or retrospective with upward or downward adjustments, depending on the circumstances.

While transfer pricing adjustments affect the profitability of companies, taxpayers also need to consider potential implications for value added tax (VAT) purposes.  

Prospective adjustments

Generally, no action is required from a VAT perspective because an increased transfer price for future sales or supplies will be reflected on future invoices, and VAT will be accounted for accordingly. 

Retrospective adjustments

Transfer pricing adjustments on imported goods

In instances when the adjustment concerns goods previously imported into South Africa, it is necessary to adjust the customs valuation declared for purposes of the import. This is usually accomplished by means of a voucher of correction(s). An upward adjustment of the value of goods previously imported will result in additional VAT being payable and, if applicable, customs duties. As with the original import of the goods, the additional VAT incurred will be recoverable if it qualifies as input tax and if the required documentation is obtained and retained.

Since the customs law requires such an adjustment be made when the taxpayer becomes aware of it, any adjustment not timely made will result in penalties and interest.

Transfer pricing adjustments on “imported services”

Transfer pricing adjustments on services acquired from a non-resident do not follow the same rules as those for imported goods because the customs law is only concerned with the cross-border movement of goods. However, if a taxpayer is liable for VAT on imported services (that is, those services acquired from a non-resident and used for non-taxable or partially taxable purposes), note that:

  • An upward adjustment will result in additional VAT being payable on such imported services.
  • A downward adjustment may mean that VAT on imported services was overpaid, and an adjustment may be made.

Again, if additional VAT is payable and the adjustment is not timely made, there may be liability for penalties and interest. 

Transfer pricing adjustments, goods or services supplied by a South African entity

In some instances, there may need to be an adjustment on goods or services supplied by a South African entity to group entities outside of South Africa. 

While logic dictates that if the original supply is zero-rated, any subsequent adjustments must follow the same tax treatment, one must consider the supporting documents. The South African entity must determine that the relevant required documentation relating to the adjustment is obtained and retained (e.g., proof of payment, voucher of correction, debit/credit notes, etc.) within the prescribed period. If the documentation is not obtained or not timely obtained, penalties and interest may apply.
 

Read a June 2021 report [PDF 229 KB] prepared by the KPMG member firm in South Africa

 

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