The 2013 budget speech did not provide for any amendments to the current transfer pricing provisions stipulated in Section 31 of the South African Income Tax Act.
The Minister of Finance did however announce that Treasury is proposing a restriction with regards to excessive debt issued to connected person creditors, where the creditor is exempt from tax on the interest. Limits will be imposed so that the interest on this form of debt does not exceed 40% of earnings after interest on other debts is taken into account. Excess interest will be allowed to roll over for up to five years. The proposal in its current state is general and wide in nature and raises a couple of questions, for example how the 40% was determined and whether the wording “exempt from tax” will for example include withholding taxes paid on the interest.
Some debt instruments (considered to be of an artificial nature) can be re-characterised as shares (along with the underlying yield) if they contain certain features. This will not apply to banks and insurers. This proposal is in line with the current provisions of Section 31 of the SA Income Tax Act which allows for the re-characterisation of the terms and conditions of a cross-border related party transaction, where the terms and conditions are considered not to be arm’s length.
A number of measures were proposed again to relax cross-border financial regulations and tax requirements on companies, making it easier for banks and other financial institutions to invest and operate in other countries. Similar measures will apply to foreign companies interested in investing in African countries using South Africa as their regional headquarters. The outward investment reforms that apply as part of the Gateway to Africa reforms will also pertain to those companies seeking to invest in countries outside Africa, including the BRIC countries.
The issuing of the long awaited new Interpretation Note providing guidance on transfer pricing and thin capitalisation was not addressed and the uncertainty created as a result of this still remains a headache for Multi-National Enterprises with South African operations.