Resolving Transfer-pricing Disputes: Are ‘Advance Pricing Agreements’ the Way Forward for SA?
07 April 2006
Posted by: TaxFind™
Resolving Transfer-pricing Disputes: Are ‘Advance Pricing Agreements’ the Way Forward for South Africa?
1 Introduction and Statement of the Problem
Adam Smith in his famous work The Wealth of Nations (1776) pointed out that the subjects of every state ought to contribute towards the support of the government in proportion to the revenue which they respectively enjoy under the protection of the state. However, the tax (contribution) which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment and the amount to be paid, ought to be clear and plain to the contributor (see AS Silke Tax Avoidance and Tax Evasion within the Framework of the South African Income Tax Legislation with specific reference to the Effect on the Fiscus and to Current Anomalies and Inequalities (1958) at 561; Keith Huxham & Phillip Haupt Notes on South African Income Tax (2005) at 2). This is necessary so that the taxpayer knows the tax consequences of any given transaction in advance. Tax planning and budgeting would be an impossibility if the parameters within which the Fiscus operates were not clearly defined.
Tax certainty is a principle that is upheld in South African tax legislation. The degree of certainty required is achieved by formulating rules which clearly indicate the methods and manner in which tax is to be collected by South African Revenue Service (‘SARS’) (Jorg Walter Haase, Nicolas Grimm & Eva Versfeld International Commercial Law from a South African Perspective (2003) at 68).
When uncertainties and disputes arise between a taxpayer and SARS about the tax consequences of a given transaction, SARS responds by providing its views on the issue or by issuing a specific ruling that relates to the specific set of circumstances. However, SARS views and rulings do not have any statutory basis and are not binding on either SARS or taxpayers (SARS Discussion Paper on a Proposed System for Advance Tax Rulings (2003) at 4). When taxpayers approach SARS for guidance on the interpretation of a specific provision of the Income Tax Act 58 of 1962 (‘the Act’), SARS responds by developing and formulating interpretation notes, guides and brochures (SARS Discussion Paper op cit at 4). SARS has also come up with practice notes that are helpful in resolving disputes. Unfortunately, SARS practice notes are not law and this limits their application as authority in a court of law.
One of the areas of our tax legislation that has been lacking in certainty and for which SARS has formulated a practice note, is ‘transfer pricing’, a concept employed to describe a method used by taxpayers to avoid paying the taxes of a given country. In order to prevent transfer pricing, most countries, including South Africa, use the arm’s-length principle to curb the depletion of their tax base. Internationally, the application of this principle entails making use of certain methods so as to arrive at an arm’s-length price. In South Africa, the working of these methods is set out in SARS Practice Note 7: Determination of Taxable Income of Certain Persons from International Taxation: Transfer Pricing (6 Aug 1999). Despite this Practice Note, choosing the right method to apply in a given situation does not always give satisfactory results. This often causes uncertainties for taxpayers about the tax consequences of their business transactions and often disputes arise between SARS and the taxpayers concerned.
In order to ensure certainty for taxpayers in applying the methods used to arrive at an arm’s-length price, jurisdictions such as the United Kingdom and the United States of America, make use of ‘Advance Pricing Agreements’(‘APAs’) that have proved helpful in resolving transfer-pricing disputes. However, APAs are not in use in South Africa and SARS has declared that APAs will not be made available to South African taxpayers in the foreseeable future but gave no reasons for this stance (SARS Practice Note 7 op cit inpar 6.2; see also David Clegg Income Tax in South Africa (May 2005) in par 24.12.1; Lynette Olivier, Emil Brincker & Michael Honiball International Tax:A South African Perspective 2 ed (2004) at 245).
In this analysis, transfer pricing is defined and the reasons why disputes arise in the application of the arm’s-length method are set out. Considerations for and against the introduction of APAs in South Africa are analysed and recommendations made for SARS to reconsider its stance on the introduction of APAs in South Africa.
Source: By Annet Wanyana Oguttu - University of South Africa (SA Merc LJ)
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