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Transfer Pricing: What Is SARS’ Stake on It and What Should You Be Doing?

Friday, 01 June 2007   (0 Comments)
Posted by: Author: Daniel Erasmus
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Transfer Pricing:  What Is SARS’ Stake on It and What Should You Be Doing?

In the second of a two-part series, tax attorney Daniel Erasmus looks at transfer pricing.Transfer pricing is still a relatively new concept in South Africa. At a recent seminar held to discuss the various issues surrounding transfer pricing, Joseph Rock, head of the SARS Transfer Pricing Desk, answered many questions.

The basic approach taken by SARS when assessing the risk with regard to transfer pricing is that it envisages that you are acting independently and at arm’s length. As a result, you would strive to obtain the best economic result possible for yourself.The starting point for SARS is to identify what the best result is, economically, and work back towards the result achieved.At the initial stage, in Mr Rock’s opinion, there are no other implications in terms of transfer pricing other than economics. If the wrong economic advantage is the outcome, SARS will quite simply expect you to adjust your outcome accordingly, or at least expect you to be able to explain your position with the relevant facts and information. 

So, the situation may now arise where SARS believes that your transaction may not have been at arms length and that economically the best deal was not achieved.However, SARS only has a certain amount of information available to them and only merely suspect that the transaction is not at arm’s length.

A line of thinking  

Mr Rock gave an insight as to the procedure from this point. SARS will, in such instances sit around a table and brainstorm or role-play such situations and see at what conclusions they arrive at.In Mr Rock’s words, they come up with a methodology or a line of thinking, which they believe is the real line of thinking behind the transaction.If it still appears that the transaction is not at arm’s length and that they can justifiably raise concerns, they will take the next step.This involves sending out a letter to the taxpayer, not alleging anything untoward but rather asking the taxpayer to explain certain facts to better answer their suspicions.This sounds suspiciously like a letter asking the taxpayer to prove his position.

A request for information

Could such letter be viewed as a request for information? The fact of the matter is that certain declarations have been made by the taxpayer; SARS suspects something is amiss; they do not have the evidence to prove such suspicions so they send a letter to the taxpayer asking certain questions. So, it is quite possible that this is the same as a request for information.These questions were put to Mr Rock and the reply may be rather chilling. 

In Mr Rock’s opinion this cannot be viewed in the manner as stated above.Simply in order for SARS to do their job as well as they can, they need such information, therefore, the taxpayer must provide it.A question was then raised as to whether this was putting an undue onus on the taxpayer with regard to him proving his innocence.

Onus of proof

Problem one. Who has the onus of proof here? SARS believes that it is the taxpayer that bears this onus.Fact is, the taxpayer has already provided SARS with a bundle of information together with declarations and possibly also a transfer pricing policy document. Why now should the obligation yet again be on the taxpayer to divulge even more information; information that may well already be in the hands of SARS?

A fishing expedition 

In addition, when wanting more information, SARS is obliged to state in terms of what legislation they want the information (in this instance section 31 of the Income Tax Act), as well as the reasons for wanting this information.Mr Rock stated clearly that in this instance they would not provide it because often the basis for wanting the information is not clear. This sounds suspiciously like a fishing expedition.If SARS has the intention of raising a revised assessment they must state as such and provide the reasons.This is what the law demands.SARS is obliged to be transparent in terms of the Constitution and if they are not conveying their true intention to you their conduct is unconstitutional.Be prepared to stand your ground if you feel that you are being treated in an unfair manner by SARS.These constitutional issues are new and still being developed and are probably best left to another discussion.

Various company policies

On the issue of various company policies: If, for example, you have a parent company based outside the country that dictates how its subsidiary company must operate in South Africa, Mr Rock stood firm on SARS’s view.It does not matter what the parent company dictates its company in South Africa to do. They will still investigate the South African company as if it is a normal company.The fact remains that money has been made in South Africa and may have been moved to the parent company 

overseas and that no matter what reason the South African company provides, reserves are down in South Africa and reserves are up in the parent company.A company must have the relevant facts on hand to explain situations such as these or situations where transactions may have taken place as part of business strategy. 


There were a number of key outcomes of this seminar.Firstly, understand that transfer pricing is a highly technical area and that there are many grey areas and flaws with regard to how best to approach the issue.Mr Rock openly admitted that it is highly complex and as a result SARS faces serious issues with regard to transfer pricing. 

The taxpayer needs to have an intimate knowledge of the hands-on operations of the business.Rather understand what the business does in terms of actual operations and then work backwards from there, instead of compiling a policy document on how you think things are run. If this is too late and SARS has jumped the gun and asked for information with regard to transfer pricing,don’t simply give in.

Source: By Daniel Erasmus (TaxTALK)



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