Transfer Pricing In South African Tax Law
Mohammed Zubair Desai
submitted as partial compliance with the requirements for the HIGHER DIPLOMA IN TAX LAW
UNIVERSITY OF JOHANNESBURG
Documentation and Bibliography
Research Methodology and Sources
The planned study is a literature review of Transfer Pricing, and subsequent interpretation and application of the principles in, academic textbooks, journal articles, publications by SARS, legislation and case law. The study revolves mainly around an analysis of South African literature and case law with reference to the UK and Australian legislation.
1.1 Introduction to the subject matter
Transfer pricing continues to remain one of the most important issues in international tax facing MNEs’ (Multi National Entities). Transfer pricing happens whenever two related companies i.e., a parent company and a subsidiary, or two subsidiaries controlled by a common parent trade with each other. When the parties establish a price for the transaction, they are engaging in transfer pricing. The term ‘transfer pricing’ is used to describe arrangements involving the transfer of goods or services, at an artificial price, in order to transfer income or expenses from one enterprise to an associated enterprise in a different tax jurisdiction.1 This, results in the income derived at for each enterprise being disproportionate to their relative economic contributions, and thus impacting the relevant tax jurisdictions’ fair share of tax. Tax authorities are therefore focusing their attention on transfer pricing rules and practices to ensure the correct attribution of income and expenses of related-party transactions. Transfer pricing is defined as the pricing of inter-company transactions that involve the transfer of goods and services between companies in the same group.
The South African (RSA) Income Tax Legislation has attempted to regulate the price at which goods or services are transferred between non-resident and resident connected persons. This was done by the introduction of both the amended and previous Section 31 into the Income Tax Act. The section makes provision for the South African Revenue Service (SARS) to make an adjustment to the transfer price in order for it to reflect an “arm’s length price”.
In terms of the Act, a non-resident must include receipts and accruals from a source within or deemed to be in the Republic into “gross income”, which would be the income, derived from the sale of goods or services to an RSA resident company. The intention of S31 of the Act is to deter foreign companies from shifting RSA source profits that would usually be taxed in the Republic, to an RSA source connected party within a group of companies that may have an assessed loss. This would be achieved by selling goods to the RSA resident connected party at a below arm’s length sales price. The foreign company would realise a small profit on the sale to the connected party and would thus pay minimal tax. The RSA resident company to whom the goods or services were made would realise a larger arm’s length profit when the goods or services are on sold to an unconnected third party. This large profit made by the RSA resident company would be set-off against the assessed loss. The RSA resident company could issue a dividend to the connected person net of dividends tax levied at a lower rate as opposed to the corporate tax rate. The old Section 31 of the Act essentially requires that an arm’s length, that is, market related, price be paid or charged in respect of the cross-border supply of goods or services between connected persons. Should the Commissioner for the South African Revenue Service (“SARS”) be of the opinion that an arm’s length price has not been paid or charged, he is entitled to adjust the consideration for the transaction in...
Bibliography: Agrawal, M.K. Transfer pricing. A beginner’s perspective, [Online] www.iimacl.ac.in/community/finclub
Anon, 2003 UK plans transfer-pricing rules for domestic transactions
Beeton D. & Kersch G, 2007, Transfer pricing. Financial Management, 1471918:42-43.
Davies, D.R, 2000. The new United Kingdom transfer pricing rules, The International Tax Journal, 26(4):58.
Dean M, Feucht F.J, & Smith, L.M.2008 International transfer pricing issues and strategies for the global firm
De Koker A. 2002: 17.54 Silke on Income Tax Vol. 3
Ernst & Young, 2009, Global transfer pricing survey report 1-180
Ernst &Young, 2010, Transfer pricing analysis-discretionary or not? International Tax Alert [Online] http://ey.com.Publication/vwLUAssets?South_Africa_transfer_pricing_analysis%
Haupt P, Notes on South African Income Tax 2013.
HMRC, 2011. Schedule 28 AA: how it works? [Online] http://www.hmrc.gov.uk/manuals/intmanual/intm432090.htm
Jooste R, 2010, Transfer pricing mind the gap, Finweek, 22 July: 36.
Kotze K, 2011, Internal transfer pricing; Be careful
Kruger, S. 2006. Transfer pricing: stemming the flow of taxation revenue from SA: international tax. Tax talk, 4:21
Law in Perspective: Transfer Pricing; What, Why and How? legalperspectives.blogspot.com/, 13 Mar 2008
JJ Loots, 2006, Comparability Adjustment Transfer Pricing Model- North West University, OECD, 2000:7
Louw H, Associate, Tax, Cliffe Dekker Hofmeyr, Polity.org.za, 2 Aug 2012
Neighbour J, 2006 Transfer pricing: keeping it at arm’s length. OECD Observer: 230.
Niemann R, & Treisch, C
OECD, 2009, OECD Transfer pricing guidelines for multinational enterprises and tax administrations, OECD publishing, France
OECD, 2010, Welcome to the OECD [Online] www.oecd.org
OECD Transfer Pricing Features of Selected Countries 2011
OECD, 2013, Welcome to the OECD [Online] www.oecd.org
OECD, 2013:5 http/www.oecd.org/ctp/tp/countryprofiles, SouthAfricaTPCountryProfile_Jan2013
Olivier L, & Honiball M, 2011, International tax: A South African perspective
Owens, J. 2004. Resolving international tax disputes: the role of the OECD. OECD Observer (243), [Online] oecdobserver.org/news/fullstory.php/aid/1290/ Resolving_ international_ta x_disputes:_The_role_of_the_OECD.
PWC- PricewaterhouseCoopers 2009
[Online] Available from:http://www.pwc.com/gx/en/international-transfer-pricing/assets/itp-2011.pdf [Downloaded: 2010-09-17].
SARS, 1999 Practice note 7
SARS, 2012 SARS homepagehttp://www.sars.gov.za/home.asp?pid=4557#whatisit
Sikka P, & Willmott H, 2010, The dark side of transfer pricing: its role in tax avoidance and wealth retentiveness. Critical perspectives on Accounting, 21:342-356.
Spearman T and et al, Grant Thornton, Global Publication, Transfer Pricing News 3, March 2013)
Standing Committee on Finance, 2010, Taxation laws amendment bills 2010: report back hearings
Strydom B, Thin Capitalisation, Transfer Pricing and Cross Border Loans; SA Institute of Tax Practitioners website, 2 July 2013)
Sweidan J, Transfer Pricing Trends & Challenges, SAIT website
Warneke D, BDO Tax Alert, Newsletter 24 May 2013
Weisener C, 2011, Transfer pricing proposals: secondary adjustments-will we pay double tax? Taxtalk, 30:17
Tobacco Father v. Cot, 1951(1) SA 150 (17 SATC 395)
ITC 569 1944 (13 SATC 447)
Australian Case Law
San Remo Macaroni Company Pty Ltd v Commissioner of Taxation (1999)
Daihatsu Australia Pty Ltd v Commissioner of Taxation (2001)
Syngenta Crop Protection Pty Ltd v Commissioner of Taxation (2005)
WR Carpenter Holdings Pty Ltd v Commissioner of Taxation (2008)
Roche Products Pty Ltd v Commissioner of Taxation (2008)
Commissioner of Taxation v SNF (Australia) Pty Ltd (2011)
Please join StudyMode to read the full document