Ricochet News

SARS to crack down on multinational companies and subsidiaries’ tax returns

By Patrick Emmett, Mazars - Sep 19, 2017
SARS to crack down on multinational companies and subsidiaries’ tax returns

Medium and large businesses with multinational ties will soon have to start supplying the South African Revenue Service (SARS) with more detailed reports of their relationships and transactions with connected entities residing in other countries.

SARS has beefed up its Transfer Pricing Division and is now actively involved in the international initiative to stop base erosion and profi t shifting by multinational companies.

This is according to Patrick Emmett, Senior Tax Consultant at Mazars Port Elizabeth, who says that not only does SARS want to stop this from happening in South Africa, it also wants to stop South African companies from doing the same in other countries.

Emmett says that this initiative aims to stop multinational companies from shifting their profi ts out of the country to more tax-friendly jurisdictions.

“A very common way that multinational companies are doing this, is by having their subsidiaries pay them a substantial “management fee”.

"The subsidiary can of course deduct this fee from its own income tax, and that money is eff ectively taken out of the country before there is a chance to tax that profi t.”

The Davis Tax Committee has stated that this is one of the main issues of lost tax revenue in South Africa, and has estimated that the amount of money being bled out of the country totals billions of Rand each year, he adds.

Emmett points out that South African companies will need to take note of a number of new requirements this year, if their tax returns are to remain compliant.

Firstly, the briefi ng note to the Final Notice issued on 28 October 2016, which sets out the transfer pricing documentary requirements, SARS have indicated that a Master File and Local File will be required to be submitted with the corporate income tax return in terms of section 25 of the Tax Administration Act, No. 28 of 2011 (the TAA).

A Master File contains high-level information of the entire multinational groups operations in a single document available to all tax authorities where the multinational group has operations, and a Local File, which contains information regarding the jurisdictional activities of the multinational entities available to local tax authorities within the jurisdiction.

Secondly, in the event of a SARS transfer pricing audit additional mandatory transfer pricing documentation needs to be provided in terms of the record keeping provisions as set out in the Final Notice issued by SARS. The Final Notice requires that specifi c
information is kept where the cross-border related party transactions are in excess of R100 million or reasonably expected to exceed the R100 million.

“Other transaction specifi c information should also be kept for cross-border transactions in excess of R5 million that are included in the R100 million,” Emmett adds.

Multinational companies, trusts and individuals in South Africa should consider all transactions with foreign connected persons, whether transacted at arm’s length or not, he says.

Emmett adds that companies that are part of a multinational group may have their transactions within the group scrutinized by SARS.

Another thing to take note of is that the South African regulations for country-by-country reporting (CbCR) requires multinational groups with a consolidated revenue in excess of R10 billion to submit a report as set out in the regulation to SARS on an annual basis for years of assessment commencing on or after 1 January 2016 Emmett says.

“The parent entity usually fi les the report in the parent country, but South African subsidiaries with parent companies in other jurisdictions are still obligated to notify SARS in writing, which entity would be fi ling the CbCR and in which jurisdiction.”

“South African companies that form part of a multinational group will need to make sure to understand its group structure and its CbCR reporting obligations and get the new paperwork in order by 31 December 2017,” concludes Emmett.

For more information, visit Mazars Port Elizabeth at 30 Bird Street, Central, Port Elizabeth, or call 041 501 9700. Also visit them at www.mazars.co.za