Implementation of advanced pricing agreements by the South Africa Revenue Service: a critical review

Transfer pricing may be described as the process by which related entities set prices at which they transfer goods or services between each other. Multinational entities (MNEs), by virtue of its global presence, are subject to different tax laws of different countries. Accordingly, MNEs can potentially set transfer prices that would result in more profit being earned in lower taxing jurisdictions rather than in countries with higher tax rates. As a result the tax base of higher taxing jurisdictions is eroded by virtue of MNE’s transfer pricing policies. The Organisation for Economic Cooperation and Development (OECD) noted that the erosion of a country’s tax base is a global issue faced by many tax authorities. In order to be transfer pricing compliant, MNEs need to ensure that their intercompany transactions are conducted at an arm’s length basis. As per the OECD Transfer Pricing Guidelines, the arm’s length principle is defined as: “the international transfer pricing standard that OECD member countries have agreed [and that] should be used for tax purposes by MNE groups and tax administrations.” The establishment of an arm’s length price by an MNE can differ to the price set by a tax authority for the MNE’s intercompany transactions. As a result of the uncertainty endured by MNEs, there has been a number of transfer pricing disputes between tax authorities and taxpayers. In order to minimise transfer pricing disputes, the OECD has recognised the need for transparent, efficient and consistent discussions between taxpayers and tax authorities. Advanced pricing agreements (APAs), as per the OECD Transfer Pricing Guidelines, is a tool that attempts to prevent disputes from arising by proactively determining the criteria for applying the arm’s length principle to intercompany transactions. In June 2017, South Africa adopted a preliminary position towards implementing measures to make cross-border dispute resolution between taxpayers and tax authorities more effective through the Multilateral Convention to Implement Tax-treaty Related Measures to Prevent BEPS (MLI). Although South Africa has shown its commitment to the OECD through signing the MLI, the South African Revenue Service (SARS) has seemingly excluded transfer pricing matters from the advanced tax ruling system. Accordingly, there is no APA program in place within the South African fiscal system. There is also very little explanation offered by SARS for not implementing an APA system. This study argues that taxpayers and the tax revenue authorities have different views on the arm’s length principle. SARS and South African taxpayers are no different and may very well face such challenges. In light of such challenges, this study investigates whether SARS and the taxpayer may find relief with the implementation of an APA program. It is suggested that through the use of APAs, the arm’s length principle will be pre-determined and agreed by the parties. This will ultimately create certainty for many taxpayers, i.e. investors, due to the predictability of the transfer prices. In addition this study recommends introducing an APA program through an amendment of the current advance tax ruling legislation in order to open the ambit so as to include transfer pricing matters. Thereafter, SARS would need to introduce an APA program under Article 25(3) of South African tax treaties, through the publication of a guide on APAs like the way it was done for the MAP