In line with the trend in most developed countries, transfer pricing (the process by which multinational enterprises set the prices at which they transfer goods or services between group entities) has become a key focus area for the South African Revenue Service (SARS). Transfer pricing has often been used by multi-national enterprises as a tool to allocate profits to low tax jurisdictions.
Transfer pricing rules were introduced as early as 1995. However, SARS only drafted their practice note on transfer pricing in 1997 and only recently acquired the necessary personnel and tools to effectively police these rules. Since the legislation has been effective as from 1995, transfer pricing adjustments can be made back to that date, with significant penalties and interest accumulating. It is thus imperative for multinational enterprises to ensure compliance with current transfer pricing legislation.
The South African transfer pricing rules and the guidelines in the practice note are based on the transfer pricing guidelines issued by the Organisation for Economic Co-operation and Development ("OECD"). The rules grant the Commissioner the discretion to adjust the consideration in respect of a supply or acquisition of goods or services in terms of an international agreement between connected persons. Additionally, any adjustment will be deemed to be a dividend for purposes of secondary tax on companies ("STC") and STC will be levied on the adjusted amount at a rate of 12,5%.
ENSafrica’s (Edward Nathan Sonnenbergs) international tax team has been involved in the area of transfer pricing from its introduction in South Africa in 1995, with one of our directors involved in the drafting of the legislation, and has undertaken transfer pricing analyses for a large number of South African and foreign multi-nationals.
The firm offers clients the full range of transfer pricing services, including:
- Undertaking a functional analysis to determine the relevant functions and risks involved in the client's cross-border transactions with connected persons
- Determining the arm's-length price with the aid of internationally accepted transfer pricing methodologies and the most advanced databases available on the market
- Exploring any tax planning opportunities within the context of cross-border related party transactions
- Preparing responses to any queries from SARS
- Drafting or reviewing client's transfer pricing policies
- Advising on compliance with all current legislative requirements