SARS is clamping down on these business transactions
The South African Revenue Service (SARS) has published a new interpretation note guiding businesses on how it assesses intra-group loans – warning that it is taking a stern position on companies that break related business principles to get a better tax outcome.
Intra-group loans refer to loans made by one company to another within the same group of companies. These loans are usually made to support the operations of the borrowing company and are typically structured as unsecured, short-term loans.
They can be used for various purposes, such as financing working capital, funding capital expenditures, or supporting acquisitions.
SARS said that issues around intra-group loans could arise where a non-resident company directly or indirectly funds a South African company – especially when they have ‘thin capitalisation’: in other words, they have too much debt against their equity.
It said that funding a South African taxpayer with excessive intra-group debt may result in excessive interest deduction – depleting the domestic tax base.
Arm’s length principle
According to SARS, the new note on the practice provides guidance on how SARS will determine “arm’s length pricing” for these types of loans.
The note also provides guidance on the consequences for a taxpayer if the amount of debt, the cost of debt or both are not arm’s length.
The arm’s length principle denotes that transactions should be valued as if they had been carried out between unrelated parties, each acting in their own best interest.
“An intra-group loan would be incorrectly priced if the amount of debt funding, the cost of the debt or both are excessive compared to what is arm’s length,” SARS said, adding that pricing for intra-group loans would consider both the amount of debt and the cost of the debt.
Therefore, it remains critically important that in any intra-group transactions, the arms-length principle is carefully observed by those participating in such a transaction, said SARS.
SARS said it would act sternly to protect fiscus if the parties are found to have acted at variance with this principle.
“Companies falling within the ambit of section 31 must have an approved transfer policy that complies with the arms’ length principle and be in a position to demonstrate such compliance and that the policy has been implemented correctly,” added the tax authority.
A transfer price is broadly the price at which goods or services are exchanged between parties, said SARS.
Transfer pricing on its own is not good or bad; it is simply a necessity, given that parties transact with each other. In a tax context, transfer pricing is of concern in situations where parties manipulate the transfer price to achieve a more desirable tax outcome.
“This is of particular concern in cross-border transactions between related parties as it is easier to manipulate the pricing and take advantage of different tax jurisdictions. This often results in tax jurisdictions not receiving the tax revenue they are rightfully entitled to receive,” it said.
The Income Tax Act contains section 31, which requires the transfer price of specified international transactions between connected persons or associated enterprises to be based on the arm’s length principle when determining taxable income.
It also sets out the tax consequences when the pricing is not at arm’s length. An arm’s length price is broadly a price negotiated on the open market between a willing buyer and a willing seller, SARS said.
Loading ...
