Transfer pricing taxes add to firms’ costs
COMPLICATED transfer pricing legislation remains a burden and has become an increased risk for multinational firms doing business in SA and the rest of the continent.
Transfer pricing is the price charged for goods and services in cross-border transactions between two companies within the same multinational group.
Companies can become a target for extra tax because transfer pricing can be intricate and often there are no direct comparisons for pricing goods and services between companies in different countries. This poses a risk as a mere half a percentage point tax adjustment — if the tax authority disagrees with a firm’s pricing policy — could add millions to costs on a major transaction.
Lack of comparable data among African countries to test the profitability of a company, or whether it is overpaying or undercharging for services and goods to a foreign related entity, adds to the difficulty.
Billy Joubert, head of transfer pricing at Deloitte, said the lack of comparable data was like living with a bad back. “You are constantly going back to the doctor for another remedy and there really is not a simple solution.”
But in many African countries where transfer pricing legislation is still new, overpaying or undercharging is not picked up, costing billions of dollars in unpaid taxes.
Bridgette Radebe, chairwoman of Mmakau Mining and president of the South African Mining Development Association, recently flagged transfer pricing as an issue, saying SA’s legislation had to be reviewed. The continued “exportation of profits” meant that mining houses could not pursue elements of the Mining Charter, such as having 26% equity owned by black people, she told a parliamentary committee.
Ms Radebe said though SA was leading in Africa in transfer pricing legislation, companies complied only when there was threat of scrutiny from the tax authorities. “The lack of dividend payments in some companies results in broad-based black economic empowerment partners being unable to fund their shares, while the non-economic empowerment partner enjoys marketing fees and management fees”, she said.
Mr Joubert said in testing the profitability of a company or the pricing of a transaction between two entities in the same group, a comparison was made with prices of a company providing the same services or goods.
“We do the best we can, but sometimes struggle to explain this in countries where transfer pricing legislation is new,” Mr Joubert said. “We have to use the developed world data, because that is all we have .”
The Organisation for Economic Co-operation and Development (OECD) issued a discussion paper in March on the lack of comparable data in developing countries, and the difficulties taxpayers faced.
“This may deny countries much-needed tax revenue and create an uncertain investment climate for business,” the OECD said.
“In addition, the lack of objective data available to tax authorities and taxpayers may result in difficulties in resolving disputes, and encourage both to adopt aggressive positions.”
