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Watch out! Section 31 of the ITA affects transfer pricing in two key ways...

by , 16 October 2013
In 2011, SARS amended Section 31 of the Income Tax Act (ITA).While this change happened over 18 months ago, not many people are aware that Section 31 significantly changes the approach to transfer pricing. Read on to discover how Section 31 of the Income Tax Act affects transfer pricing so you can comply.

SARS watches transfer pricing closely. It'll scrutinise your pricing policy to ensure you're not trying to evade tax when you adjust the price of your foreign goods and services.

And with Section 31 in place, these transactions are under more scrutiny than ever.

Revealed: Two ways Section 31 of the ITA affects transfer pricing

#1: According to the Practical Tax Loose Leaf Service, Section 31 aims to catch both direct and indirect transactions. This means the new section of the Act affects transactions between connected parties and dealings between a group and third parties in other countries.

#2: In terms of Section 31, when you complete your company tax return, you have to prepare it on the basis that you conducted all your cross-border transactions at 'arms' length'.

Arm's length means 'between two unrelated third parties'.

This means, you must adjust your local profits to conform to arm's length pricing. In the past, you could escape additional tax under Section 76 even if your pricing wasn't at arm's length.

But now things have changed. You MUST apply arm's length pricing.

Investopedia defines an arm's length as a transaction in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm's length transaction is to ensure that both parties in the deal are acting in their own self interest and aren't subject to any pressure or duress from the other party.

If you don't apply arm's length pricing SARS could impose any one of the various penalties under the Tax Administration Act. This includes jail time and hefty penalties.

Remember, ignorance is no excuse. Make sure you familiarise yourself with Section 31 of the ITA to get your transfer pricing.

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