Critical analysis of the components of the transfer pricing provisions contained in Section31(2) of the Income Tax Act, no 58 of 1962

[摘要] ENGLISH ABSTRACT: Despite the fact that transfer pricing legislation (i.e. section 31 of the Income Tax Act, 58of 1962 ('the Act) has been in force in South Africa since 1995, it has only been in thelast three years that the South African Revenue Service ('SARS) has embarked on anumber of assessments of taxpayers' cross border transactions with foreign groupcompanies. In particular, the SARS targets taxpayers that have rendered cross borderservices (including financial assistance) to a foreign group company for no considerationand has assessed these taxpayers on the adjusted interest/ fee amounts.Since the burden of proof lies with the taxpayer to demonstrate that its cross bordertransactions with foreign group companies do not infringe the provisions of section 31(2)of the Act, this study provides taxpayers with guidance as to when its transactions wouldfall within the scope of application of section 31(2) of the Act and when the SARS wouldbe excluded from applying the provision of section 31(2) of the Act.Following upon a critical analysis of the essential components of section 31(2) of the Actthe following conclusions are drawn by the author:• If the taxpayer proves that it did not transact with a connected party (as defined insection 1 of the Act), or it did not supply goods or services in terms of aninternational agreement (as defined in section 31(1) of the Act), or its transferprice would be regarded as arm's length, the Commissioner would be excludedfrom applying the provision of section 31(2) of the Act since all of thecomponents to apply section 31(2) of the Act are not present.• The current view held by the South African Revenue Service and tax practitionersthat transactions between a South African company and an offshore company,which are both directly or indirectly held more than fifty percent by an offshoreparent company, are transactions between connected persons (as defined in5section 1 of the Act) is incorrect in law. Section 31 of the Act is not applicable tosuch transactions.• The Commissioner will be excluded from making a transfer pricing adjustment toa service provider's taxable income where the following circumstances arepresent:o Where the cross border transaction with a connected party does not giverise to gross income, which is the starting point in the determination oftaxable income, since the service provider agreed to render services for noconsideration and was therefore not entitled to receive income (i.e. noreceipt or accrual) ando Where the service provider can provide evidence that demonstrates thatthere was no practice of price manipulation as regards the transactionunder review.

[发布机构] Stellenbosch University