Take this one to court please - Sars
Billy Joubert is a director of Taxation Services at Deloitte and is rated as one of the top transfer pricing specialists in the world. He qualified as an attorney and did his legal articles at Webber Wentzel. In a recent interview with MoneywebTax he disclosed one of the South African Revenue Service's (Sars') weaknesses.
What is transfer pricing?
Transfer pricing is an anti-avoidance rule. So it is designed to try and stop multinational groups from realising their profits in a lower tax jurisdiction and South Africa is a relatively high tax jurisdiction so we wouldn't want a South African based multinational to make all their profits in a lower tax jurisdiction which you could do by selling goods or services at artificially lower prices in that jurisdiction and then sell it to the markets at market prices. So transfer pricing rules say you are required to transact with foreign related parties at arms length pricing in other words as if they were unrelated.
So in others words let's say a multinational based in the US distributes goods in South Africa it could be anything, clothing, cosmetics, food even, we in South Africa want to make sure that the correct profit is declared here so they will check the pricing of sale into South Africa and make sure the price isn't inflated because the effect of inflating the price is to make too much profit in the US.
Are there any court cases involving transfer pricing?
Interestingly enough transfer pricing is becoming more of an issue around Africa. More and more countries, including Namibia, quite recently have introduced the rules and the first African transfer pricing case happened in Kenya, even know they haven't had it that long.
It will certainly happen but hasn't yet. I think most disputes have been settled because the tax baron, Sars, has reached some kind of an agreement.
What is the dispute likely to be around?
Really it can be around anything. For example, Sars is not happy with the profits of an SA entity and they will argue it is because the South African entity has either undercharged or overpaid: for exports it with be undercharging for imports overpaying...
I think what is quite interesting to note is the biggest settlement in the history of the IRS was a transfer pricing matter and that was billions of dollars. And the issue there was intellectual property basically the payment of royalties and it is often an area that can be very contentious because you're not buying a physical thing, you are buying something that is not tangible. So if I was trying to guess where the first case in South Africa is likely to be I would suspect it would relate to intellectual property.
Isn't transfer pricing a very lucrative area for Sars?
I think potentially it should be but you need very specialised staff, which they've got but it takes years to build up expertise and I think Sars has had good people coming and going. The scarcity of resources is a big issue that's why for example they've excluded transfer pricing from ATRs (Advanced Tax Rulings), you can't get one on transfer pricing matters, you can't go to an ADR (Alternative Dispute Resolution) on transfer pricing it is specifically excluded. Basically they are saying it is too complicated it has to go to court.
What is an ADR?
Alternative Dispute Resolution, which is a fairly new proceeding of Sars, is designed to avoid the need to go to court. It is a separate forum where you as the taxpayer and Sars appear; you argue, Sars argues and there is a mediator who tries to mediate a settlement.
It is without out prejudice, so if you don't manage to get a settlement you're not bound by it. If you do settle it is often a lot less time consuming and expensive than going to court.