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South Africa Cracks Down on Financial Transactions

22nd February 2022

Years ago, intercompany financial transactions didn’t warrant much attention from busy tax authorities—but it appears those days are long gone. The OECD incorporated a framework to determine arm’s length financial transactions into the 2022 Transfer Pricing Guidelines and tax authorities are taking the hint and casting watchful eyes over intercompany loans, guarantees, cash pools, you name it. The South African Revenue Service (SARS) understands the importance of arm’s-length intercompany financing and just this month has taken steps to embrace the OECD’s recommendations on the matter by introducing a draft interpretation notice mandating that OECD’s guidance on financial transactionsi.e. delineating transactions to arrive at arm’s-length results—replace South Africa’s previous policy, which though followed, has never become official law. Since 2013, SARS identified high-risk transactions through a formulaic means. If the debttoEBITA ratio of the borrower was more than three to one, then the borrower was considered high risk and the burden of proof was on the taxpayer. In the 2022 draft note, however, SARS proposes tossing the riskratio rule and mandates that transfer pricing rules takes precedence over interest limitation rules. Taxpayers can weigh in on the draft interpretation note until April 29, 2022, but no matter what you think of the potential legislation, the real takeaway is that if South Africa is stepping up its compliance legislation on intercompany financial transactions, don’t you think taxpayers should too?