03 Feb SARS Eyes Cross-Border Business Transactions

SARS Eyes Cross-Border Business Transactions

There have been a myriad of changes in South Africa’s tax realm in the past few years, and experts warn that we should keep on our toes if we’re to avoid landing in hot water. The latest warning is aimed in particular at businesses operating across borders.

Rand Rescue takes a look at what’s on the cards for taxpayers in SA.

Zero-tolerance for non-compliance

It’s no surprise that SARS is upping the ante in 2023 although tax compliance has been up year-on-year for 21/22, the service provider is still chasing R35-billion in tax debt cases against 186 691 taxpayers for the current year of assessment alone.

As is the standard rhetoric – the taxman has once more warned that they have a zero-tolerance policy for non-compliance. While this seems quite fair, for many South Africans the problem comes in with knowing what exactly is expected of them. But SARS’s beef doesn’t seem to be with the man on the street this time around…at least not for now.

Instead, they are scrutinising transactions between companies falling under the same holdings or parent companies. 

Transactions and loans

SARS seem especially keen on scrutinising business accounts, including their methodologies for acquiring and extending intra-group loans.

On 18 January 2023 SARS published a new interpretation to guide businesses for assessing intra-group loans. Such loans are classified as credit extended to different companies under the same group of companies.

In its release, SARS notes how the divergent tax treatment of equity and debt becomes problematic when calculating the taxpayer’s taxable income. Where the taxpayer’s source of income includes exorbitant debt capital – especially when funded from intra-group, back-to-back or intra-group-guaranteed debt by non-resident parties – such deductions deplete the South African tax base. This depletion occurs where said debt results in excessive interest deductions which lead to a mismatch between varied exemptions, rate reductions and withholding tax on interest. Such a mismatch between debt and equity is deemed ‘thin capitalisation’.

SARS is dedicating more resources to look into businesses and individuals seeking to hoodwink tax authorities to crop their tax obligations.

The Arm’s Length principle

The OECD defines the ‘arm’s length principle’, as a valuation principle used when assessing commercial and financial transactions between related companies. The principle states that, “transactions should be valued as if they had been carried out between unrelated parties, each acting in his own best interest.”

Given that companies acting under an umbrella-company often extend unsecured, short-term loans to each other to support operations, the arm’s length principle has not been adequately applied in the past – purportedly due to lack of clarification.

With clarification now provided, SARS is giving businesses and tax practitioners clarification on how to determine whether a transaction is considered arm’s length or not. Companies would need to determine whether their intra-group loans are correctly priced, taking into account both the amount and cost of debt.

Approved transfer policy

To ensure compliance, companies who fall within the ambit of Section 31 of the Income Tax Act 50 of 1962 are to ensure that they have an approved transfer policy in place.

Said policy is to include approved transfer prices which broadly categorise the cost of goods or services exchanged between parties. With an approved policy in place, manipulation of transfer prices for more desirable tax outcomes are proscribed. 

Cross-border transactions

While the taxman is certainly interested in the above-mentioned transactions on local turf, its primary interest lies with those transactions which occur across borders.

The rationale is simple: it’s far easier to manipulate pricing when one operates between different jurisdictions with varied tax treatment, divergent financial systems and dissimilar auditing requirements. 

There’s no hiding

SARS already has the cooperation of the OECD and all countries compliant with the automatic exchange of information (AEOI). The Revenue service has also indicated that they’re modernising their systems even more, and are leveraging innovations such as machine learning and artificial intelligence to improve its monitoring, data gathering and parsing activities. The group hopes to be completely modernised as soon as 2024.

The writing’s on the wall: dare to dodge the taxman, and face the music!

Are your affairs in order?

If you need  assistance with cross-border transactions or dealing with SARS, simply leave your details below and Rand Rescue will get in touch for a free consultation.

We’ve helped thousands of South Africans to navigate their way through the endless red tape and intricate regulatory requirements imposed in SA and abroad.

Trust the experts with your financial affairs!

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Sources:

1. [DOCUMENT] “Interpretation Note 127: Determination of the Taxable Income of Certain Persons from International Transactions: Intra-Group Loans” 2023. South African Revenue Service. Income Tax Act 50 of 1962, Section 31. https://www.sars.gov.za/wp-content/uploads/Legal/Notes/Legal-IN-127-Determination-of-the-taxable-income-of-certain-persons-from-international-transactions-Intra-group-loans.pdf
2. Directorate, OECD. 2023. “OECD Glossary Of Statistical Terms – ArmS Length Principle Definition”. Stats.Oecd.Org. https://stats.oecd.org/glossary/detail.asp?ID=7245#:~:text=This%20valuation%20principle%20is%20commonly,in%20his%20own%20best%20interest.
3. Writer, Staff. 2023. “SARS Is Clamping Down On These Business Transactions”. Businesstech.Co.Za. https://businesstech.co.za/news/finance/657179/sars-is-clamping-down-on-these-business-transactions/.