This is the last week that we deal with part 14 of the tax return. We will
cover part 14.8, which is not likely to affect an ordinary taxpayer such as
you and me.
It is intended for sophisticated taxpayers who have dealings with
international partners affecting commercial transactions.
When goods and services are supplied or acquired in terms of an
international agreement and the buyer is somehow connected to the supplier
and the price of those goods/services is not reasonable (ie too low or too
high in the circumstances), the Receiver has power to adjust those prices
in determining your tax exposure.
Let`s look at an example. You have a business manufacturing clothes. It
costs you R500 to produce a certain type of a suit which you sell for R800
but you export it to your brother`s business in Kenya for R600.
This is
clearly not an arm`s length transaction because your special relationship
with your ``partner`` (in this case your brother), influences the price that
you have set for that partner.
The effect is that the profit that you declare to the Receiver here is R100
but would have been R300 if you sold those clothes to someone unconnected
to you. The Receiver will simply adjust the profit to R300 and tax that
R300 accordingly.
Another anti-avoidance section deals with situations where your foreign
partner gives you a loan which the Receiver feels is too excessive in
relation to the capital that has been invested in your business. The
problem for the Receiver is that the interest expense that you incur will
be too high and will reduce your tax burden.
Let`s say you have invested R100 000 in your business and you arrange a
loan with your foreign partner of R600 000. The Receiver will take a view
that a portion of this R600 000 loan is not actually a loan but capital
(equity) just like the R100 000. So, a portion of the interest you pay your
foreign partner on the R600 000 will not be allowed as a tax deductible
expense but will be considered as a dividend.
The issues mentioned here include indirect situations where your foreign
partner provides guarantees to South African banks for giving you a loan.
For both these anti-avoidance sections of the Tax Act, you have the right
to object and appeal against the Receiver`s decision if you feel that you
have been prejudiced. I have covered these principles in broad terms just
to highlight the issues involved.