Transfer Pricing and internation transactions between connected persons

Question 1

How does Section 31 work?

Answer 1

section 31 of the ITA
- it is an anti-avoidance provision
- it applies to any transaction, operation, scheme, agreement or understanding that is an affected transaction that results in a tax benefit

Section 31(1) of the ITA
- an affected transaction is Any transaction, operation, scheme, agreement or understanding
(a) directly or indirectly entered into or effected between, or for the benefit of
either or both of the following connected parties
- resident and non-resident
- non-resident and Republic PE of another non-residents
- resident and non-Republic PE of another resident
- non-Republic and CFC of any resident, and
(b) terms and conditions differ from an independent arm’s length transaction

Section 31(2) of the ITA
- The taxable income must be adjusted as if that transaction had been entered into on the terms and conditions that would have existed between independent
persons dealing at arm’s length

Section 31(3) of the ITA
- this is like punishment tax
- if resident company – deemed to be a dividend consisting of a distribution of an
asset in specie** and paid by that resident to the other person (ie Dividends Tax)
- other than a company – donation made to that other person (ie Donations Tax)
- The deemed dividend or donation is deemed to take place six months following
the year of assessment in respect of which the adjustment is made.????( what does this mean?)
- the dividends tax amount itself must be paid to SARS within 6 months after the current year end.
- Specifically excluded from the “Dividend” definition in section 1 BUT included in
the “Dividend” definition for Dividends Tax.

Question 2

How would section 31 apply in a case where the terms are not favourable in the transaction but still different from those that would happen in the market?

Answer 2

the commissioner can still apply section 31 and deal with the transaction in the same way, it’s just that now the taxable income will be still reversed and the difference whether good or bad will be charged as a dividends Tax or donations Tax

Question 3

What is a connected person in terms of Section 31?

Answer 3

According to Section 31(4) of the Income Tax Act
- It’s the same as the definition in section except that if you own 20%, you are still connected even if someone owns majority share holding

According to Section 1 of the ITA
- A company and another company are related if they own 50% or more of the share holding OR they own 20% holding or more and no one else is holding majority voting rights in the company