TRANSFER PRICING
Transfer pricing refers to the internal price tags companies set for goods and services traded between their subsidiaries in different countries. This practice is particularly relevant for Multinational Enterprises (MNEs) with a global presence. While transfer pricing offers flexibility for managing internal operations, it`s crucial to ensure these prices are set fairly. There`s a potential risk of companies manipulating these prices to shift profits to countries with lower tax rates as identified in the OECD BEPS Actions 8 - 10. The OECD Multilateral Instrument contains specific provisions that seek to prevent this form of base erosion and there are many examples of domesticated specific anti-avoidance provisions around the world`s jurisdictions.
In SA, if the Transfer Price is at variance with the "Arm`s Length Price", SARS is empowered to invoke section 31 of the Income Tax Act 58 of 1962 and correct what it considers to be a serious erosion of the SA Tax Base. Should this occur, depending on the circumstances, penalties (to various degrees) and interest will be levied. The cost of non-compliance is therefore steep. It should be noted that the determination of an "arm`s length price" is not a simple task and there are different methodologies to be applied in different commercial settings in developing the Transfer Pricing Policy for an MNE. As such, parties to a cross-border transaction can easily fall foul of the arm`s length principle without the intention to erode any tax base.
The guidance of a Transfer Pricing expert should therefore be sought when parties (especially connected persons) conduct cross-border transactions. It is also recommended for MNEs or similar cross-border connected structures to have a Tax Risk Committee that conducts ongoing compliance monitoring.