SARS further tackling down multinational entities in respect of transfer pricing

On 31 August 2020, the South African (“SA”) Tax Court delivered judgement in the case referred to as SARSTC 14302. The court ruled against the taxpayer in respect of an application for discovery of documents relating to an underlying transfer pricing assessment matter. The case, as well as the underlying transfer pricing dispute, are briefly summarised below.

Although this case specifically deals with the application for discovery of documentation, the underlying case, which was set to be held in October 2020, relates to a transfer pricing dispute.

The applicant, ABC Limited, is a multinational telecommunications conglomerate operating in Africa and the Middle East. The subsidiaries in Africa and the Middle East pay a royalty to ABC Limited for the use of the brand.

SARS has disputed that the royalty paid by 14 of the subsidiaries were not on an arm’s length basis and that ABC Limited, based in SA, should have received a higher remuneration for the use of the brand by its subsidiaries.

SARS accordingly seeks to adjust the applicant’s income for the 2009 to 2012 years of assessment in terms of section 31(2) of the Income Tax Act.

The applicant contends that the additional assessments raised by SARS will result in certain subsidiaries being subjected to double taxation. Thus the applicant has sought to invoke a Mutual Agreement Procedure (“MAP”) process. A MAP process involves the competent authorities of each contracting state under a Double-Taxation Agreement to resolve a situation where a taxpayer may be subjected to double taxation, by mutual agreement.

The applicant is of the view that it is entitled to the discovery of the documents relating to the MAP process, in terms of Rule 36 of the Tax Court rules. The aim of this article is not meant to elucidate the outcomes of this matter, however, it endeavours to highlight that SARS is now more than ever scrutinising transfer pricing transactions between cross-border related parties, resulting in more transfer pricing cases emerging.

It should be noted that this case was a result of an underlying case. The current judgement only dealt with the application for the discovery of documentation and the disputed matter around the transfer pricing adjustments is still to be addressed. It would be important to keep a close eye as the rest of the case unfolds, as significant transfer pricing considerations could arise for future reference in SA.  

Multinationals are encouraged to take note of this judgement and review their transfer pricing policies and documentation to ensure that transactions occur on an arm’s length basis and that risks are mitigated.

Author: Kaneez Khair