SARS' Customs Branch and National Targeting Unit have been focusing more extensively on the impact that transfer pricing year-end adjustments have on the value of imported goods. Advance notice of potential adjustments is required in terms of the Customs and Excise Act to avoid penalties.
South Africa’s Customs authority is responsible for ensuring that the value of imported goods accurately reflects all dutiable cost elements. The primary basis for customs valuation of imported goods is the 'transaction value', which is defined in the Act as "the price actually paid or payable for goods sold for export in the Republic", subject to certain conditions.
Multinational enterprises are required to ensure that the transaction value (i.e. the price of the imported goods) declared for customs duty purposes was not unduly influenced by the relationship between affiliates. In other words, the circumstances surrounding the sale between the related buyer and seller must satisfy the arm's length principle, as described in the World Trade Organisation Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994. If it can be shown that the relationship between the affiliated parties did not influence the price of the imported goods, the transaction value will be accepted for customs duty purposes.
Multinationals who make transfer pricing year-end adjustments to bring realised profit margins in line with a targeted arm's length range are required to disclose this in their income tax return for the relevant year of assessment. After this disclosure, multinationals are often burdened with requests from SARS for more information about these adjustments. This is because section 41(4) of the Act requires advance notice to be given to SARS of any adjustments made in terms of price review clauses in an applicable transfer pricing policy, which may have an impact on the customs value of the imported goods.
Section 41(4) of the Act states that all particulars are required to make a valid entry and all the details of the transaction value must be declared in the prescribed invoice. A year-end adjustment that is made for tax purposes without an actual invoice price adjustment may be construed by Customs as a 'price influence'.
Therefore, any credit or debit note that is received by the taxpayer (the importer) from its related supplier to effect a transfer pricing year-end adjustment must be submitted to SARS within one month of receiving it. Following this, SARS will consider the effects of the transfer pricing policy on the transaction between the affiliates when determining the acceptability of the adjustment and will engage with the taxpayer to agree on how the adjustment should be allocated across all the imports for the relevant year of assessment.
Undisclosed adjustments result in non-compliance with the provisions of the Act, which may result in an additional assessment, together with penalties and interest. This risk must be managed appropriately and proactively. To avoid having to respond to irrelevant questions and a protracted investigation process that is likely to absorb significant time and resources, we urge multinationals to:
- prepare and maintain a transfer pricing policy, which accurately delineates the factual arrangements and information related to transactions with offshore connected parties and the criteria or formula that must be applied to establish the intercompany transfer price (transaction value) of imported goods; and
- notify SARS Customs in advance of the existence of such a policy and the potential effects that the price review clauses may have on the customs value of the imported goods.
If you require more information or assistance on this issue, please do not hesitate to contact the Webber Wentzel international trade tax team headed by Carryn Alexander.