Proposed changes to secondary transfer pricing adjustment – further developments

We have previously reported on the draft Taxation Laws Amendment Bill 2014 (Bill) that was released by the National Treasury and the South African Revenue Service (SARS) earlier this year, and specifically in respect of the proposed changes to the secondary transfer pricing adjustment mechanism.

The secondary transfer pricing adjustment mechanism, contained in s31(3) of the Income Tax Act, No 58 of 1962 (Act), currently takes the form of a deemed loan in an amount equal to the difference between the arm’s length amount that is taken into account for tax purposes of any resident party as a result of the primary transfer pricing adjustment and the non-arm’s length amount that would have been taken into account had there been no primary transfer pricing adjustment.

For various reasons it was proposed in the draft Bill that the deemed loan be changed to a deemed dividend. Some of the criticisms raised by interested parties were that the draft Bill did not deal with:

• instances where the party deemed to pay the dividend is a holding company or a natural person;
• when the dividend is deemed to be paid;
• to whom the dividend is paid; and
• current deemed loans.

Treasury and SARS have now released a response document to the comments received from the public, as well as well as a final Bill (tabled in parliament on 22 October 2014), in which it has now been clarified that:

• where the person is a natural party or a trust, the amount will be deemed to be a donation and not a dividend – no compromise has been made in respect of where the party is a holding company (and such company therefore risks not being able to make use of any participation exemption);
• the dividend will be deemed to be paid by the resident six months after the end of the tax year in which the adjustment is made; and
• existing deemed loans will be deemed to be dividends in the case of companies and donations in respect of natural persons or trusts.

It is encouraging to see that National Treasury and SARS have taken cognisance of the public’s concerns and that most of these have been addressed in the latest final Bill.