Mr. MZ Desai

Topics: Transfer pricing, Tax, Taxation Pages: 58 (20050 words) Published: October 8, 2014

Transfer Pricing In South African Tax Law


Mohammed Zubair Desai
submitted as partial compliance with the requirements for the HIGHER DIPLOMA IN TAX LAW
at the
July 2013


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.

Chapter One


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...

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