An analysis of the South African income tax legislation in respect of transfer pricing

Transfer pricing has become a very popular term in South Africa over the last few years, even more so since July 2013 when the Base Erosion and Profit Shifting (BEPS) Action plan was issued by the Organisation for Economic Co-operation and Development (OECD) and G20 (an international forum for the governments and central bank governors from 20 major economies). The OECD and G20 has issued the plan to address the perceived flaws in international tax rules, giving rise to profit shifting. Subsequently, the OECD has issued numerous reports and as a result has updated its 2010 Transfer Pricing Guidelines. Many countries have adopted these guidelines. However as South Africa is not an OECD member, there is no certainty that it will be adopted. The question is therefore: has the South African Tax legislation met the OECD guidelines and addressed the BEPS issue? Therefore, the objective of the research is to understand whether the current South African tax legislation is in line with the OECD Transfer Pricing Guidelines and BEPS Action Plan. The South African tax legislation provides South African taxpayers with no guidance as to how the OECD Transfer Pricing Guidelines needs to be implemented and interpreted. However, even though not legislation, the SARS practice note 7 and draft interpretation note on thin capitalisation provides taxpayers with a good basis of understanding the OECD Transfer Pricing Guidelines, as these documents provided by SARS is similar to that of the guidance in the OECD Transfer Pricing Guidelines, specifically relating to transfer pricing documentation. The issue that may result where the South African tax legislation is not in line with the OECD guidelines and the BEPS Action Plan is that Multinational Enterprises (MNEs) may use South Africa as the country to shift its profits to or from, thus effectively resulting in a loss to the Fiscus