I saw that he killed your friend.
I am puzzled before I translate it when considering the expression of verb tense. I will give two translations
Which one is correct and why?
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The latter is better, though the former is not wrong.
As you know, verb tense is relative in Japanese. Regarding your sentence, it seems that the incident was ongoing at the relatively present time when 'I' saw him. So we typically use the present tense in the noun phrase; namely, 殺す rather than 殺した.
But the former translation is not wrong. In this case, 殺した sounds like 殺してしまった, that is, 'have killed.' So it implies the speaker saw he finished killing the friend.
If you want to emphasize the concurrency, the following translation is fine:
私は彼があなたの友達を殺すところを見た。 (I saw him killing your friend.)