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The sound of a loophole snapping closed (transfer pricing)

14 May 2012   (0 Comments)
Posted by: SAIT Technical
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By Matthew Lester (Tax Talk 13 May 2012)

Recent amendments to the transfer-pricing provisions contained in section 31 of the Income Tax Act have increased the stakes substantially.

Transfer pricing involves transferring income from one entity to another, fictitiously inflating the price of goods and services. The paying entity (usually a South African taxpayer) then claims the expense as a deduction. The recipient entity, usually a non-resident taxpayer in a tax haven, then pays little or no tax.

Prior to the rebuilding of the SA Revenue Service, transfer pricing was rife and schemes were very basic. There was also the added incentive of extracting cash from South Africa and building a nest egg in a tax haven for the day the country blew up or the rand took a dive.

Prior versions of transfer-pricing provisions only attacked transactions between "connected persons". Taxpayers easily jumped this hurdle.

The new provisions contain a far more extensive list of transactions and it is almost impossible to create a transaction that is not within their scope. Superficial disguises simply do not work as any transaction that "directly or indirectly" affects taxable income is now subject to adjustment.

In the past, section 31 was driven by a discretion granted to the SARS commissioner. Thus SARS had to uncover a transaction before section 31 could be applied.

Today the onus is with the taxpayer to disclose a transfer-pricing adjustment on submission of the tax return. Failure to do so will result in the imposition of tax, dividend tax, additional tax and interest. This can easily more than double the stakes.

After a transfer-pricing adjustment has been revealed, it will be subject to a further adjustment every year until it is reversed. It is a "double jeopardy" provision that warns taxpayers to try transfer pricing at their peril.

The problem in defending taxpayers in transfer-pricing disputes is to find evidence that all transactions are actually at arm's length. As there may be a delay of many years between concluding a transaction and substantiating the pricing to SARS, such evidence tends to evaporate - leaving the taxpayer very vulnerable.

Any business is well advised to keep substantial records in anticipation of a transfer-pricing inquiry from SARS. And when in doubt, consult an expert.


Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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