Asset management services performed by a resident in a different jurisdiction to the recipient of the services gives rise to potential transfer pricing implications that should be borne in mind.

Section 31 of the Income Tax Act empowers the South African Revenue Services (SARS) to adjust the price payable in respect of a supply or acquisition of goods or "services" in terms of an "international agreement" entered into between "connected persons". This will generally be done if the price is higher or lower than an arm’s length price and profits are shifted out of South Africa, i.e. where goods or services are provided at an artificial price.

Not only may SARS adjust the price but section 64C of the Act provides that where a South African company has benefited its non-South African shareholder by means of such transfer pricing, the amount adjusted by SARS will be treated as a deemed dividend subject to secondary tax on companies (STC).

The starting point is to determine whether the asset manager falls within the scope of the transfer pricing provisions. As mentioned above, the essential elements are that the asset manager must provide "services" to a "connected person" under an "international agreement".

For the purposes of section 31, "services" includes the making available of any facility or advantage, the granting of financial assistance and the performance of any work. The rendering of asset management services accordingly falls within the ambit of the section.

Whether or not the recipient of the asset management services can be said to be a "connected person" in relation to the asset manager can be problematic as the definition of that term is fairly complex. However, the recipient of the services will be regarded as connected to the asset manager if it has a significant shareholding in the asset manager, if there is a subsidiary/ holding company relationship or if they are fellow subsidiaries.

An "international agreement" includes a transaction, operation or scheme entered into between a South African resident and a non-resident in respect of the supply of goods or services.

However, even if the asset management services rendered by an asset manager in South Africa is subject to the provisions of section 31, no tax consequences arise if the fee charged by the asset manager is an arm’s length one. Thus, in order to avoid an application of section 31, the fee charged for the management services in terms of an international agreement between connected persons should be a fair, arm's length prices.

An arm’s length price is the general term used to refer to the consideration that would have been payable by third parties dealing at arm's length. Comparability is therefore fundamental to the application of the arm’s length principle, which essentially means that the transactions should be compared with similar transactions between third parties (i.e. not connected persons).

In establishing the quantum of the management fees, the following factors are a few that should therefore be borne in mind in order to avoid any adverse South African tax transfer pricing implications –

  • economic and market conditions;

  • the relative importance of the functions performed; and

  • the terms and conditions of the relevant agreements.

It is imperative that the fees actually charged are consistent with the contract terms and conditions. In addition, it is advisable that the management services rendered are evidenced by relevant documentation, for example a correspondence file containing pertinent e-mails, memos, etc.

In addition, if services are rendered on credit and inter-company debtors remain outstanding for lengthy periods without an interest charge, this practice would not be consistent with the arm’s length principle (whereby interest would be charged to third parties). There is accordingly a risk that SARS may adjust the fees charged with the relevant arm's length interest rate applicable to the number of months during which interest-free credit was given.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.