Business Day reported that in 30 cases since 2014, the South African Revenue Service (“SARS”) had made transfer pricing adjustments of more than R20 billion, with an income tax impact of R5 billion. Minister Pravin Gordhan expressed in his 2017 budget speech that SARS is increasing its auditing capacity on the transfer prices imposed by multinational entities (“MNEs”). One of the measures implemented to enhance SARS’ oversight on MNEs’ transfer pricing policies is the new Country-by-Country reporting (“CbCr”) standards for MNEs.

On 23 December 2016, South Africa issued Government Gazette 40516, which gives effect to the new regulations on CbCr requirements for MNEs. These regulations follow the 2015 final report from the Organisation for Economic Development’s (“OECD”) Base Erosion and Profit Shifting (BEPS) initiative that was adopted by the G20 countries. Although South Africa is not part of the G20, it is a follower of the OECD. Action plan 13 of the final OECD report provides CbCr requirements for MNEs, which the South African regulations have adopted.

Who Must File a Country-by-Country Report in South Africa?

 The CbCr regulations impose an obligation on certain MNEs to file a CbCr with SARS if certain criteria are met. One is obliged to file a CbCr with SARS if the Ultimate Parent Entity of an MNE Group is resident for tax purposes in South Africa. A Constituent Entity that is not the Ultimate Parent Entity of an MNE Group is obliged to file a CbCr with SARS if it is a resident for tax purposes in South Africa and one of the following criteria are met:

The Ultimate Parent Entity of the MNE Group is not obliged to file a CbCr in its jurisdiction of tax residence;
The Ultimate Parent Entity’s jurisdiction in which it is resident for tax purposes does not have a Qualifying Competent Authority Agreement (i.e.: an agreement between the respective countries allowing for the automatic exchange of CbCr information) in effect with South Africa by the time of the filing deadline (31 December 2017); or
There has been a Systemic Failure of the jurisdiction of tax residence of the Ultimate Parent Entity to automatically exchange CbCr information with South Africa.
MNEs are excluded from filing a CbCr if the MNE Group’s consolidated revenue is less than R10 billion, or €750 million if the Ultimate Parent Entity is tax resident in an EU member’s Jurisdiction.

What Information Must Be Contained in the Country-by-Country Report?

 Article 4 of the regulations require that, inter alia, a CbCr  disclose the following information regarding each jurisdiction in which the MNE Group operates:

Aggregate revenue amount;
Profit or loss before income tax;
Income tax accrued and income tax paid;
Number of employees;
Tangible assets other than cash;
Identity of every Constituent Entity of the MNE group;
The jurisdiction of each Constituent Entity’s tax residence; and
The nature of the main business activities of every Constituent Entity.
Use of the Country-by-Country Reporting Information

Article 6 of the regulations provide that SARS must preserve the confidentiality of the information contained in the CbCr. Furthermore, SARS may not base a transfer pricing adjustment on the CbCr. The purpose of the CbCr is to assess high-level transfer pricing risks and other BEPS risks in South Africa, which includes assessing the risk of non-compliance with transfer pricing rules by members of the MNE Group. Despite these regulations, Bloomberg BNA recently reported that MNEs based in Germany doubt that BRICS nations will preserve the confidentiality of the information in their CbCr and have expressed a concern that information will be leaked to the press and expose their global tax profits. It remains to be seen what impact this concern of German based MNEs will have on the automatic exchange of CbCr information with South Africa.

Other Transfer Pricing Documentation Requirements

 Taxpayers must not only take cognisance of the CbCr regulations, but also the documentation requirements as set out in Government Gazette 40375. The regulations in this publication set a considerably lower threshold than the CbCr regulations. Unlike the R10 billion consolidated group revenue threshold in the CbCr regulations, the documentation requirement regulations impact all persons that have entered into an affected transaction and the aggregate of those transactions for the year is reasonably expected to exceed R100 million, or the potentially affected transaction is reasonably expected to exceed R5 million.

Conclusion

If a MNE Group is required to comply with the CbCr regulations, one of the entities in the group will have to file the CbCr in its jurisdiction of tax residence. This information is to be automatically exchanged with the other jurisdictions the MNE operates in. Taxpayers are advised to prepare transfer pricing documentation as well as CbCr as soon as possible to identify whether the regulations will impact on SARS’ transfer pricing risk assessment of the MNE Group.