It is common practice for group companies to enter into agreements with each other for the recovery of expenses incurred by one company within the group from its connected parties. Such cost recoveries or recharges may consist of combined insurance policies, staff costs, shared services like Information Technology, office rent, telecommunications, entertainment, and the like. These costs are often invoiced in the form of management fees or as a cost recovery.
One should take care in these instances as intercompany charges and recoveries generally have VAT, Income Tax, and sometimes Transfer Pricing implications. The incorrect tax treatment of such transactions may result in SARS imposing understatement penalties.
When specifically focusing on the VAT implications for intercompany transactions, it is imperative to ascertain whether such on-charges or recoveries will be regarded as a taxable transaction and subject to VAT at the standard rate, where the transaction is between local companies within the group. These transactions may also be entered into with one company in the group being the agent, which is acting on behalf of a connected party, which is the principal. Furthermore, care must be taken to ensure that the VAT Act is correctly applied in respect of the specific intercompany rules for the time of supply and value of supply.
It also applies to cross-border intercompany transactions and may have a greater implication in determining whether these transactions qualify for VAT at the zero-rate, or not. In addition, Income Tax and Transfer Pricing provisions should be considered where the transactions are between local and foreign group companies.
VATIT assists clients with an in-depth analysis and review of intercompany transactions to ensure clients are compliant with the various tax legislations. Kindly contact one of our intercompany transaction specialists at info@vatitsa.co.za for assistance.
Article by: Deon Le Roux, Senior Tax Manager