Transfer Pricing Audits
04 March 2011
Posted by: Author: Prof. Daniel Erasmus
Transfer Pricing Audits
SARS and various revenue authorities within South Africa are increasing their audits of multinational corporations on transfer pricing issues after sending senior tax officials on a training programme in London during the course of 2010.Multinational corporations, according to a recent worldwide survey conducted by Ernst & Young, can expect about a 40% chance of being subjected to such a transfer pricing audit.This places transfer pricing as a very high risk item.
There are a number of issues that revenue authorities such as SARS are misapplying in their audit procedures.
It has become the practice of SARS to issue a detailed letter of findings at the conclusion of any investigation or audit of a multinational corporation explaining to them the relevant facts and law in detail that they are going to rely upon in raising additional assessments against the taxpayer.This is in fulfillment of the audi alterem partem principle of law which is well established in South Africa.
Taxpayers, on receipt of the letter of findings, are then given the opportunity to respond to the detailed findings in order to give them an opportunity to convince SARS not to raise the additional assessments.This important procedural step will be made law when the new Tax Administration Bill is finally promulgated.Currently, it is a legitimate expectation which exists in favour of taxpayers who can expect that SARS will follow this important procedural step.The procedure was created by the former commissioner, Pravin Gordhan, back in 2002.
Failure by SARS to adhere to this important procedural step before issuing additional assessments will result in any follow-up additional assessments being issued wrongfully and subject to review and being set aside by the High Court in accordance with the Promotion of Administrative Justice Act, 2000.
The writer was recently successful in acting for and on behalf of a multinational mining group where SARS issued a letter of findings that was defective.A court order was issued against SARS – the effect of which resulted in SARS abandoning its audit and its findings.The benefit to the mining group was some R3.5 billion.
One of the common transfer pricing attacks appears to be around the issue of intra group service charges.Section 31(2) of the Income Tax Act, 1962 allows the commissioner to adjust the taxpayers’ gross income to compensate for what the commissioner believes to be an arms-length charge between international group companies.In order for the commissioner to exercise his discretion, he must be satisfied that the charge between these companies is not arms-length.The commissioner has in practice acknowledged that the exercise of such discretion cannot be based on the estimates and must be supported by evidence to suggest the contrary.
A common tactic of SARS is to simply ask the taxpayer to what extent it has complied with the 371 pages of the OECD guidelines on transfer pricing, which in itself is an unreasonable question as any such response would take any taxpayer a considerable amount of effort and time to formulate a coherent response.Inevitably the taxpayer gropes in the dark answering the question by usually referring to its transfer pricing policy documents, which contains the manner in which it executes transfer pricing in the group.
What SARS then typically does is not focus on any comparative analysis done of fair and reasonable service charges compared with the taxpayer and any other intra group relationships set out in a comparable analysis report.Instead, SARS then jumps to the conclusion that the taxpayer has failed to demonstrate that it has received any benefit from the services and in the absence of providing such evidence, SARS deems the entire service charge not to be arms length.This is not bona fide conduct of SARS as, in essence, SARS is suggesting that the taxpayer in question is lying about any benefit that may have been received in respect of these services.SARS in effect makes such allegations in the absence of any substantial evidence to support such an allegation.This type of issue must play itself out in the letter of findings process between SARS and the taxpayer.
Source: By Daniel Erasmus (TaxTALK)