South Africa’s 2014 budget contains proposals for changes to the transfer pricing rules and cross-border taxation.

Among the transfer pricing and cross-border tax provisions in the 2014 budget are the following measures:

Secondary adjustment for transfer pricing:

It is proposed that the provision for a “secondary adjustment” in the form of a deemed loan be removed. A secondary adjustment would be made after an initial adjustment has been made to profits under the transfer pricing rules. The extra funds that have effectively been transferred to a related party by charging non-arm’s length prices are currently deemed to be a loan. The transfer pricing law would be amended to deem the secondary adjustment to be a dividend or capital contribution, depending on the facts and circumstances, and no longer a loan.

Foreign dividends of controlled foreign companies (CFCs) owned by individuals:

If a controlled foreign company, in which a resident individual holds shares, receives a taxable foreign dividend, the effective tax rate on the dividend is 21%. It is proposed that the ratio be changed to reflect the fact that an individual, not a company, is taxed with reference to the foreign dividend.

Tax exemption for CFCs:

For a South African resident company that owns many foreign companies, it is difficult to establish whether the “high” foreign tax exemption applies if most of the income of the controlled foreign companies (CFCs) is attributable to a foreign business establishment. It is proposed that an option be provided to deem the net income of a CFC to be zero if either the high foreign tax or the foreign business establishment test, when applied to aggregate taxable amounts, is met.