An evaluation of transfer pricing provisions for financial assistance granted by a foreigner to a resident
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Transfer pricing rules are anti-avoidance measures that are governed by section 31 of the South African Income Tax Act No. 58 of 1962 (Income Tax Act). Section 31(6) of the Income Tax Act provides an exemption (subject to certain requirements) from applying transfer pricing rules which allows South African holding companies to finance foreign subsidiaries with interest-free loans without worrying that the loan will be deemed to bear interest as per transfer pricing rules. Section 31 of the Income Tax Act does not provide a similar exemption from applying transfer pricing rules in the case of a foreigner granting financial assistance to a resident. This was identified as a possible deficiency in the legislation since tax treatment that are more burdensome to a foreigner than a resident may potentially not be in line with the transfer pricing guidelines provided by the Organisation of Economic Co-operation and Development (OECD). This could indicate that the South African Revenue Service (SARS) failed to align the transfer pricing rules with the guidelines provided by the OECD, as was their announced intention with the changes made to section 31 of the Income Tax Act in 2012. The findings of the study indicated that the absence of an exemption for a foreigner providing financial assistance to a resident from applying transfer pricing rules may be more burdensome to foreigners than residents and therefore potentially not in line with article 24 of the OECD Model Tax Convention. It was further found that the absence or implementation of such an exemption is unlikely to affect potential investors regarding investment decisions. Double Taxation Agreements (DTA) were found not to provide relief from transfer pricing liabilities (such as withholding tax on secondary adjustment deemed dividends), which further indicate that the burden on foreigners may be unfair compared to that of residents.