Presentation to the
Portfolio Committee on
Trade and Industry
Transfer pricing in South
Africa
22 April 2015
Purpose of Transfer Pricing Rules
• Transfer Pricing (TP) rules are antiavoidance rules
• They are designed to ensure
taxpayers do not manipulate prices
within multi-national groups, thereby
group shifting profits to lower tax
jurisdictions
• This behaviour potentially has the
effect of eroding the tax base of the
countries with higher tax rates
• Combined effect is referred to as
BEPS
• TP done in a very similar way
around the world.
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Presentation to the Portfolio Committee on Trade and Industry April 2015
© 2015 Deloitte Touche Tohmatsu Limited
Impact on Industrialisation
• TP rules themselves are probably
neutral as regards promoting
industrialization; their purpose is simply
to achieve arm’s length profits across
value chain.
• Therefore they are designed to achieve
arm’s length profits regardless of
whether a particular economy is highly
industrialized or not. They follow the
inherent attributes of the economy.
• However, TP rules based on
international best practice provide
investors with certainty.
• They also protect the tax base of the
relevant country.
• They can be compared to a tug-of-war
(between authorities)
• Therefore they are an essential part of
any tax system (except for very low tax
jurisdictions)
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Presentation to the Portfolio Committee on Trade and Industry April 2015
© 2015 Deloitte Touche Tohmatsu Limited
Impact on Real transformation on Economy
• TP rules neutral here as well:
do not promote any specific
economic policy.
• However, protection of tax
base and promotion of
investor certainty equally vital
in this context.
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Presentation to the Portfolio Committee on Trade and Industry April 2015
© 2015 Deloitte Touche Tohmatsu Limited
The global standard
• The OECD adopts the arm’s length standard as the
globally accepted standard for transfer pricing – it
eliminates the opportunity for Multinationals to
manipulate pricing between entities within the same
group.
• The Transfer pricing Guidelines adopts this standard
as guidance for the application of Article 9 of the
Model Tax Convention (MTC).
• South Africa widely adopts the MTC in the treaties it
signs to avoid the incidence of double tax.
• The TP Guidelines are a consensus document of
Working Party 6 of the Centre for Tax Policy at the
OECD of which South Africa is an observer and
active contributor.
• This is critical to align with the tax policies adopted
by most of South Africa’s trading partners.
• This ensures each jurisdiction is able to tax its fair
share of the profit.
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Presentation to the Portfolio Committee on Trade and Industry April 2015
© 2015 Deloitte Touche Tohmatsu Limited
The global standard
• The United Nations Practical Manual on Transfer
Pricing also endorses the arm’s length principle.
• South Africa has adopted the arm’s length standard
in its domestic transfer pricing rules and endorses
this as the globally accepted standard.
• South Africa has been and continues to be an active
contributor to the various discussions at Working
Party 6 in relation to on going transfer pricing
developments, including discussion on BEPS.
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Presentation to the Portfolio Committee on Trade and Industry April 2015
© 2015 Deloitte Touche Tohmatsu Limited
South African transfer pricing rules
• Originated in 1995 and provided a discretion to the
Commissioner to adjust consideration paid or
received if transaction not arm’s length.
• Recognised the importance of the global standard
and endorsed this in the legislation borrowing heavily
from countries such as Australia and New Zealand
(both OECD member countries).
• One of the first countries in Africa to adopt specific
transfer pricing rules.
• Has recruited and developed a dedicated transfer
pricing audit team at SARS to audit potential transfer
pricing mispricing.
• Result is revenue generation of approx. R5bn over
last three years from 30 audits and adjustments
totally R20bn.
• South Africa also one of the lead countries in noting
that the legislation had weaknesses and needed
overhauling.
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Presentation to the Portfolio Committee on Trade and Industry April 2015
© 2015 Deloitte Touche Tohmatsu Limited
South African transfer pricing rules
• New legislation brought in affective from 2012 year.
• More closely aligned the global standard as
endorsed by Article 9 of the MTC to extend the
legislative teeth to adjust not just the consideration,
but any of the terms and conditions of a transaction.
• Changed the transfer pricing rules to a self
assessment provision.
• Introduced a secondary adjustment mechanism.
• New rules are more closely aligned to the global
standard and are ahead of many other countries e.g.
Australia.
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Presentation to the Portfolio Committee on Trade and Industry April 2015
© 2015 Deloitte Touche Tohmatsu Limited
BEPS
• Four actions focusing on transfer pricing
• Improved documentation and country by country
reporting
• Transfer pricing of intangibles
• Focus on high risk transactions such as
management services.
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Presentation to the Portfolio Committee on Trade and Industry April 2015
© 2015 Deloitte Touche Tohmatsu Limited
South Africa legislative remedy supporting transfer
pricing and BEPS
• Introduction of interest limitation rules and antiavoidance rules for hybrid instruments.
• Introduction of broader withholding tax rules.
• Restrictions on deductions for certain IP
transactions.
• Exchange control restrictions impacting ability to pay
certain fees.
• Self assessment provisions and inherent
requirement for transfer pricing documentation
requirements.
• IT14 and IFRS disclosure requirements for cross
border transactions
• Stringent CFC rules.
• Davis Committee recommendations.
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Presentation to the Portfolio Committee on Trade and Industry April 2015
© 2015 Deloitte Touche Tohmatsu Limited
Weaknesses and areas of development
• Resource capacity at SARS to implement audit plan.
• Strong reliance on use of Alternate Dispute
Resolution to resolve transfer pricing disputes as
opposed to litigation or Mutual Agreement Procedure
which provides for greater certainty.
• No APA program which encourages greater
compliance and eases international trade and direct
foreign investment.
• Lack of certainty in terms of outdated Practice Notes
(2 and 7) and delay in issue of final IN.
• Limited guidance on implementation of new
secondary adjustment mechanism and interaction
with the Double Tax Agreements.
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Presentation to the Portfolio Committee on Trade and Industry April 2015
© 2015 Deloitte Touche Tohmatsu Limited
Summary and conclusions
• South Africa adopts and implements the recognised global standard for
transfer pricing.
• Its legislation is world standard being ahead of many developed
countries.
• It is an active contributor to global best practice through its input to
Working Party 6.
• SARS has already adopted and implemented many legislative remedies
to counter BEPS and is ahead on disclosure requirements for transfer
pricing.
• South Africa has robust measures through CFC rules and Exchange
Controls to compliment the already robust transfer pricing legislative
regime.
• SARS has recognised the need for greater certainty in transfer pricing
and is considering an APA program.
• SARS also notes that transfer mispricing is not a major concern in the
mining industry.
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Presentation to the Portfolio Committee on Trade and Industry April 2015
© 2015 Deloitte Touche Tohmatsu Limited
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