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Taxation
Monday, October 13, 2014 - 02:16
Little reliance on SARS meetings

“Transfer pricing” is one of the key tax risks facing multinationals in South Africa. With increased complexity, onerous compliance requirements and uncertainty regarding current transfer pricing regulations, international investors, especially those who wish to use South Africa as a springboard into Africa, are facing significant challenges to doing business in the country.
This is the view of Karen Miller, head of Transfer Pricing for Deloitte Western Cape, who recently spoke (August 2014) at a Deloitte seminar held in Stellenbosch. Transfer pricing is the trading price for goods or services sold between two legal entities within one multinational enterprise.
“While the South African Revenue Service (SARS) has geared up significantly in this area of taxation over the past five to six years, recent legislative changes with limited guidance for implementation, coupled with uncertainty as to how SARS will accept and implement many of the changes being proposed by the Organisation for Economic Co-operation and Development (OECD), is further adding to the frustration felt by multinationals,” says Miller.
She explains that the OECD’s new Transfer Pricing documentation guidance has provided greater clarity, but the country by country reporting is still creating some issues for multinationals seeking to be compliant in South Africa. This, is evident in SARS’s increased disclosure requirements on the annual tax returns, which is problematic as many multinationals are not necessarily geared to provide the information required.
“While most multinationals are looking towards more clarity, certainty and consistency when it comes to the actual implementation of the transfer pricing legislation, outdated practice notes coupled with the uncertainty of SARS’s acceptance around comparability analysis continues to place pressure on multinationals aiming to meet compliance requirements whilst conducting business in South Africa.”
Miller says that most countries provide clear guidance on the suitability of comparable data and what documentation requirements are needed. OECD member countries offer the ability to obtain certainty through the Advance Pricing Agreement (APA) process, which is a transfer pricing agreement between a taxpayer and a taxing authority or between two or more taxing authorities.
“What most multinational corporations would like to see in South Africa is the implementation of APA’s so that there is agreement with tax authorities around transfer pricing as well as certainty, at a local and broader level. However, because an APA is currently not in place, companies are going ahead with individual approaches to transfer pricing, not knowing whether SARS is going to accept them or not.”
Billy Joubert, Deloitte National Head of Transfer Pricing, says that SARS is generally quite willing to meet with taxpayers or their advisors to discuss transfer pricing matters informally. This can also be done by advisors without disclosing the names of the clients. This enables taxpayers to get some indication of SARS’s views in relation to areas of uncertainty.
“However, this mechanism provides limited assurance since there is no formal outcome of the meeting. In practice Deloitte would usually draft minutes of the meeting but these are not binding on SARS. Also, the personnel at SARS changes quite regularly and this makes it difficult to place much reliance on such meetings – particularly some years after the event,” explains Joubert.
Miller says that with no APA process available, the increased incidence of transfer pricing audits creates significant difficulties as they impact daily business operations and often take years to resolve.
“This is coupled with a high incidence of double taxation as most cases are resolved using the settlement process which does not absolve the incidence of double taxation. In addition, South Africa is lagging behind other African countries, such as Nigeria, who already provide a framework for negotiating APA’s with multinationals. Kenya, Tanzania and Uganda are likely to implement APA’s in the foreseeable future, which could possibly make these territories more favourable than South Africa for multinationals looking to do business in Africa,” says Miller.
Joubert notes that an interim stage to a full blown APA process – which involves bilateral discussion between revenue authorities of two countries - might be a system in terms of which SARS provides written transfer pricing rulings to taxpayers. Such rulings – sometimes referred to as unilateral APA’s – are less onerous to implement than full APA bilateral APA’s. Transfer pricing matters are, for reasons which have never been explained, currently expressly excluded from the formal SARS ruling process.
“A unilateral APA process could pave the way for a proper APA system in due course,” concludes Joubert.

Copyright © Insurance Times and Investments® Vol:27.10 1st October, 2014
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