Transfer Pricing in South African income tax law

'Transfer pricing continues to be, and will remain, the most important international tax issue facing MNEs.' 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. 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. Another key issue, closely related to transfer pricing, is that of double taxation. Multinational enterprises, engaging in cross-border transactions, are at risk of having a single source of income taxed in two jurisdictions as a result of an incorrect application of transfer pricing rules. The purpose of this research is to evaluate South Africa's approach to transfer pricing, as well as compare it to the approaches as adopted by selected countries, namely Australia, the United Kingdom and Canada, with the aim of identifying the areas that South Africa could learn from practices in foreign jurisdictions. Specific issues dealt with include acceptable transfer pricing methods for determining an arm's length price, documentation requirements and non-compliance penalties, the use of Advance Pricing Agreements ("APA"), and the effects of e-commerce in applying the arm's length principle. The first issue relates to the criteria for the selection of the most suitable method in ensuring an arm's length outcome. Because the South African market is considered to be lacking in comparables, compliance with the arm's length principle will be determined by evaluation of the facts and circumstances of each case. The second issue looks at the transfer pricing policy documentation required to be prepared, the benefits of preparing such documentation, and the imposition of penalties on taxpayers failing to do so. The lack of statutory documentation requirements and specific penalty provisions in the South African legislation is also addressed. The third issue evaluates the use of APAs in resolving transfer pricing disputes. This technique is adopted by Australia, the United Kingdom and Canada, and therefore an assessment is made, taking into account both advantages and disadvantages of the technique, to determine whether it would be beneficial to South Africa to be able to agree in advance to transfer pricing methods to be applied to transactions with connected parties, thus reducing the potential for expensive and time consuming disputes with the South African Revenue Service ("SARS"). The fourth and final issue explores the challenges facing tax jurisdictions as a result of an increase in electronic trade. The relevance of the arm's length principle is assessed and recommendations for South Africa are made