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Transfer Pricing in South Africa:

15 by 2015?National tax laws have not kept pace with the globalisation of corporations and the digital economy, leaving gaps that can be exploited by multi-national corporations to artificially reduce their taxes.

OECD’s 15 step Action Plan on Base Erosion and Profit Shifting (BEPS) offers a global roadmap that will allow governments to collect the tax revenue they need to serve their citizens. It also gives businesses the certainty they need to invest and grow.

As a developing country we depend heavily on tax revenues. Consequently, creating robust and equitable tax policies and implementing fair and effective tax systems has become critical.

So how feasible is the 15 step Action Plan within South Africa and Africa as a whole?

The topics of discussion in Africa with regards to Transfer Pricing are:

African countries with TP legislation/rules:

Capacity constraints

1995 – 2000: Zambia and South Africa

2001 – 2005: SA, Zambia and Namibia

2006 – 2010: SA, Zambia, Namibia, Kenya, Malawi, Egypt, Algeria

2011 – 2015: SA, Zambia, Namibia, Kenya, Malawi, Egypt, Algeria, Cameroon, Ghana, Senegal, Nigeria, Tanzania, Zimbabwe and Uganda

The increased focus on transfer pricing is as a result of the rise in the the outbound transfer of funds which ultimately results in the erosion of that country's tax base.

SARS currently lacks the capacity to deal effectively with local transfer pricing matters, which can potentially affect the economy by billions of Rand.

SARS need to bolster its staff to match this fiscal challenge, and to invest heavily in the future of Transfer Pricing in SA.

The African Tax Administration Forum (ATAF), which comprises of 36 African member countries, is a platform for mutual cooperation, whereby African countries can share views on tax matters and best practices with the aim of making a substantial contribution towards levelling the playing field in the area of transfer pricing.

Legislative barriersCurrently no African countries are a member of the OECD, despite SA being one of its five key partners. In the absence of transfer pricing legislation, both tax administrations and MNCs have only limited guidance to which they can refer when determining TP in related party transactions.

So as a start, the TP regulations will be focused on the arm’s length principle whereby a price that is set between two companies is required to be market related i.e. the price they would sell to or buy from an independent third party. There is always the incentive to shift profits from companies resident in high tax paying countries to companies resident in low tax paying countries.

Lack of comparable dataA lack of local comparable data often forces MNCs and revenue authorities to use non-domestic comparable data (often sourced from European or North America databases) which doesn’t reflect local market conditions. This lack of comparable data creates challenges for taxpayers and administrators, resulting in difficult tax audits.

The raw material rushMany African countries are rich in raw material and natural resources and their national welfare depends on an appropriate share of profit from the exploitation of their natural resources.

If the tax regime doesn’t regulate the appropriate split of these profits, there could be a loss in revenue for the countries, intrinsically, there is widespread concern for the mining-sector in sub-Saharan Africa, where there are several investment incentives and inconsistencies in the granting of tax incentives.

Why – because there is no clear rule on who owns the mine – the country or the company – but the company could try take profits outside the country, which is unfair. Hence the need for regulations.

Africa in the futureWith increased Foreign Direct Investment into countries it becomes that countries responsibility to address this. While TP is a long term goal, it will help with the protection of revenues from both raw materials and domestic tax base which are likely to dictate Africa’s priorities in the future. TP will help prevent the erosion of the tax base across Africa as profit is currently being stripped out of these countries.

www.bdo.co.za

CAPACITY CONSTRAINTS

RAW MATERIALS

TRANSFER PRICING HOT

TOPICS IN AFRICA

COMPARABLE DATA

LEGISLATIVE BARRIERS

By Roxanna Nyiri, Head of Transfer Pricing, BDO South Africa