Transfer Pricing Adjustments and VAT BGR 68

When VAT and TP collide

In today’s instalment of re-imagining Def Leppard songs, we discuss some interesting happenings in South Africa regarding how VAT adjustments can trigger transfer pricing implications.  On 1 December 2023, the South African Revenue Service (SARS) issued Binding General Ruling 68 (BGR 68) which provides clarity on the acceptable documentation substantiating input tax deductions on upward price adjustments on imports. Building on our previous insights on the implications of customs value adjustments, this newsletter outlines the required documentation for an input tax deduction for upward pricing adjustments on goods previously imported into South Africa (SA) and the potential implications for multinational enterprises (MNEs).

Upward price adjustments and how they work

When vendors import goods, they may need to adjust the customs duty value of these previously imported items for a number of commercial reasons, resulting in additional customs duties and import Value Added Tax (VAT) becoming payable. To correct any inaccuracies in the original declaration, importers must submit a Voucher of Correction (VOC). According to BGR 68, some vendors also use a Customs and Excise Billing Declaration (CEB01) form for this purpose. However, the CEB01 form alone does not suffice for an input tax deduction on upward pricing adjustments.

For vendors to claim this input tax deduction, they must possess the customs release notification and, according to section 16(2)(d) of the Value-Added Tax Act 89 of 1991 (VAT Act), hold a bill of entry or other prescribed documents such as a VOC, along with the receipt for the VAT payment. Vendors often apply for rulings requesting that SARS accept the CEB01 form under section 16(2)(g) of the VAT Act, allowing for alternative documentation to substantiate the input tax deduction.

So, what do you need?

BGR 68 clarifies that the VAT Act’s framework intended for vendors to deduct input tax on VAT declared at the time of import and on any subsequent adjustments, based on section 16(2)(d). However, it was not anticipated that vendors might struggle to obtain the necessary documentation and be rendered unable to obtain the necessary documentation to substantiate the input tax deduction.

BGR 68, issued under section 72 of the VAT Act, specifies that vendors do not need to apply for individual rulings as required under section 16(2)(g) for transactions covered by this ruling. In terms of the ruling, the Commissioner exercises his discretion under section 16(2)(g) to allow a vendor a deduction of the “input tax” in respect of the upward pricing adjustments of goods acquired by it from a supplier and imported into SA based on the vendor being in possession of the following documentation when the VAT return containing such a deduction is submitted to SARS:

• Single Administration document 500 (“SAD 500”) form
• Electronic Data Interchange form
• Invoices received by the vendor for the price adjustments
• A letter to SARS disclosing the upward pricing adjustment and the application to account for VAT and duties
• A letter of demand and a letter issued from SARS permitting the adjustments
• CEB01 form
• Proof of payment of the import VAT for the upward pricing adjustment paid to SARS

The deduction must be made within the five-year prescription period when the ruling was issued or any subsequent tax period.

Relevance for MNEs

For businesses engaged in related party transactions, adjusting the prices of imported goods from other group companies to reflect arm’s length prices may impact customs duties and VAT, leading to additional VAT payments. BRG 68 clarifies the documentation required to substantiate an input tax deduction in respect of the additional amount of VAT payable.  

Key takeaways

BGR 68 applies to all vendors, including those transacting with related parties and can be relied on to support input tax deductions without seeking a private ruling if the relevant conditions are met. At Regan van Rooy, we can help you understand the tax implications of importing goods into SA and assist in ensuring that your business stays compliant with tax laws.