The risk of transfer pricing audits is growing for multinationals
Locally, SARS is looking for ways to increase revenue without raising taxes, while internationally there is a push for more transparent record-keeping by multinationals
One area where the government can collect large amounts of revenue without having to raise taxes is transfer pricing audits.
The South African Revenue Service (SARS), through its transfer pricing unit, has already upped its audits of multinational companies in recent years, resulting in transfer pricing adjustments running into billions of rand in additional income tax.
A transfer price is the price of goods and services charged between companies within the same group of companies when they engage in cross-border transactions.
Statistics from global tax and advisory firm EY show that in 30 cases over three years up to 2014, SARS made transfer pricing adjustments of more than R20bn, with an income tax impact of R5bn.
One of the issues facing SARS during audits is insufficient information and a lack of proper record-keeping by multinationals of their cross-border transactions.
In line with international developments, notably the action plans by the Organisation for Economic Co-operation and Development (OECD), to combat base erosion and profit shifting, SARS has issued guidelines on mandatory record-keeping for transfer pricing transactions.
Keith Engel, CEO of the South African Institute of Tax Professionals (SAIT), says African countries are now sharing information like never before.
Organisations like the African Tax Administration Forum (ATAF), the OECD and multilateral donor organisations are facilitating audits.
Country by country
This and a multitude of other issues facing multinationals in coming years will be discussed during SAIT’s annual transfer pricing summit in Johannesburg, starting on Monday.
Another of these issues is the adoption of country-by-country reporting.
Annual compliance is set to begin in earnest in the next two years. More and more countries will now be expecting these "heavy-duty and complex reports" from company, says Engel.
"Transfer pricing is no longer just unenforced law confined to the pages of books. Each country is adopting its own new set of laws and regulations, demanding even more local reports," he says.
Jerome Brink, associate in the tax and exchange control practice of Cliffe Dekker Hofmeyr, says it has now become compulsory for certain organisations to prepare and keep on record transfer pricing documentation.
"This is not an overly onerous legislative requirement and is rather in keeping with international standards," he says in an article on the latest public notice, published by SARS, pertaining to mandatory record-keeping.
Brink says the additional record-keeping requirements for transfer pricing transactions may very well increase the compliance costs of some taxpayers.
It also places them at risk when they are subjected to SARS audits and the records have not been kept in accordance with the recently published guidelines.
The threshold for companies that are obliged to keep records has been revised to include a company that has entered into a "potentially affected transaction" and the total of these transactions exceeds R100m.
An affected transaction is any transaction between companies or subsidiaries within the same group.
Engel says that as the pressure on governments to prevent base erosion and profit shifting increases, transfer pricing will remain at the forefront of every multinational company and tax advisers’ concerns.
"With the recent OECD action plans released and revised, the predicted heavier compliance burden is now fully under way," says Engel.
The SAIT transfer pricing summit aims to unpack the truth and the hype about cross-border tax avoidance and evasion.
It will also look at concern about the potential misuse of country-by-country reporting — where multinational companies are obliged to provide the performance of each subsidiary and affiliate in the countries where they operate, the tax charge of each subsidiary and affiliate, and the details of their gross and net assets for each country.