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Imminent changes to transfer pricing documentation
The Davis Committee has prepared an interim report setting out its position on the OECD BEPS Action Plan. Taxand South Africa outlines the report below.
The fundamental change that was made to transfer pricing legislation in South Africa on 1 April 2012 was that a taxpayer must make any transfer pricing adjustments that might be required in the calculation of its taxable income itself, whereas previously transfer pricing adjustments could only be made by SARS through the exercise of discretion. This places a significantly greater onus on taxpayers to confirm the arm’s length nature of its connected party transactions.
In this regard, to ensure that taxpayer’s can make an assessment of their own compliance with the arm’s length principle, the Davis Committee is of the view that the current Practice Note 7 contains unclear documentation guidelines for taxpayers and consequently, the Report makes the following recommendations to revise the transfer pricing documentation guidelines:
- Practice Note 7 must be revised and updated to be in line with the OECD revised 'Transfer Pricing Documentation Guidelines'
- The OECD’s recommendation that countries should adopt a standardised approach to transfer pricing documentation that follows a three-tiered structure consisting of a master file, a local file and country-by-country reporting should be adopted
- The master file, the local file and the country-by-country report should be reviewed and updated annually and database searches for comparables be updated every 3 years
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The report reiterates the general rule that the compliance costs related to the preparation of transfer pricing documentation should not be disproportionate to the benefits thereof. However, taxpayers choosing not to prepare documentation in line with the guidance will be at risk.