Transfer Pricing – the most pertinent international tax and compliance consideration for Multi-National Enterprises wishing to progress in the ever-evolving global economy. Whether setting up your first subsidiary in a foreign country, or adding your 20th to an already robust and successful group structure, one thing is clear; fall foul of the “arm’s length principle” and face the consequences!

Although the “arm’s length principle”, and Transfer Pricing specific Articles, are well-established international principles of the Organisation for Economic Co-operation and Development, many MNEs find themselves facing Transfer Pricing Audits on a regular basis. Practically, this stems predominantly from failing to establish the correct tax and legal foundation to support the commerciality and profitability of “affected transactions” between companies under common control.

Poor Precedent, but Strong Statement by SARS

From a domestic perspective, South Africa has historically seen minimal precedent on navigating litigious actions based on improper Transfer Pricing. This all changed with the recently handed down Tax Court judgement in the case of ABD Limited v CSARS, 14302, where, although findings were made in favour ABD, the road to judgement was riddled with complexity, as is Transfer Pricing.

The issue in contention is not one unfamiliar to MNEs in the telecommunications and software industries, being that of licensing Intellectual Property to subsidiaries, and receiving royalties in return – standard model really for any tech-based MNE, including web-based platform providers. Upon a proper and careful reading of the case, it appears it was all down-hill for SARS from the moment they elected to change experts during the course of the Appeal proceedings – if you doubt your own expert witness, chances are the Courts will doubt you!

Now although the findings were not the precedent SARS had hoped to set, the message sent out is clear as day – under the stewardship of Commissioner Kieswetter, non-compliance of any nature will not be tolerated! When it comes to Transfer Pricing related compliance, SARS is aligning itself with the global crackdown on general anti-avoidance; examples such as the UAE introducing Transfer Pricing in June 2023 succinctly crystalise this stance.

Procedural Practicalities of Pricing

Practically, we have seen giants in various industries being toppled in a matter of weeks, either due to not following the correct legal guidance in adhering to their Transfer Pricing obligations, or simply, somehow being unaware of the immense compliance burden. 

The confusion often arises from some countries historically utilising safe harbours, whereas others rely solely on accurate and legally sound benchmarking studies, to satisfy an acceptable inter-quartile range. 

This IQ range is then translated into the applicable intra-group agreement, ensuring compliance with the “arm’s length principle”, and where correctly drafted by a tax specialist attorney, will be sure to withstand the scrutiny of respective revenue collectors!

In the ABD Case the initial report supporting the 1% Royalty Rate was conducted using rates from the 18 countries in which ABD’s Operational Companies were situate, and finding a group average – range cited is 0,7% - 1,3%. Although the literal middle-ground is a firm and round 1%, Transfer Pricing is not often as simple as this.

Where there are numerous transactional classes, often independent analysis is required per class, as each will have a respective comparable market, which IQ range underpins the transaction in question.

Navigate the Complexities of Compliance with Ease

In practice, and to ensure group compliance, it is essential for MNEs to enlist the appropriate tax advisory, and legal muscle, ensuring all Transfer Pricing documents, including Local and Master Files, are legally sound and will meet the muster of any revenue authority.

As a rule of thumb, any cross-border related party transaction should be navigated by a strong multi-faceted tax, legal, and financial team. This will not only serve to safeguard you against potential future audits, but also ensure best practice group Transfer Pricing policies are correctly prepared and successfully implemented.

With anti-avoidance risks mitigated, you can safety focus on growing your business, without having to look over your shoulder at every airport! 

Written by Jashwin Baijoo, Head of Strategic Engagement & Compliance at Tax Consulting SA; and Michelle Phillips, Tax Attorney at Tax Consulting SA