THE South African Revenue Service (SARS) is investigating possible changes to the law to make it easier for it to audit transfer pricing by multinational companies to ensure that they pay their rightful tax dues to the government.
The need to maximise tax revenue has become particularly acute in the current climate of low economic growth.
The legal amendments under consideration by SARS are in addition to others that the tax review committee under Judge Dennis Davis — which is also investigating base erosion and profit shifting — might recommend.
The use of transfer "mispricing" by multinationals to shift profits from high to low tax jurisdictions is a global problem that results in countries losing tax revenue from business activities within their borders. The practice occurs through the sale of goods and services within multinational groups at prices that are not at arm’s length.
SARS has adopted a "robust" approach to auditing such transactions, recovering more than R5bn in additional tax over the past three years after auditing more than 30 companies. Transfer pricing adjustments of just more than R20bn were made in these cases, SARS research executive Franz Tomasek told a meeting of Parliament’s mineral resources and finance committees.
Sunita Manik, head of SARS’ Large Business Centre, which has a dedicated unit conducting transfer pricing audits, said these audits were "very robust" and had yielded a 30% improvement so far this year on last year’s results. Already adjustments of R10bn had been made to assessment values.
The session on transfer pricing followed calls by the Economic Freedom Fighters (EFF) for transfer pricing to be declared illegal, but as Mr Tomasek pointed out, all multinationals legitimately use it to transact within themselves.
What was at issue was the mispricing of goods and services in order to shift profits to a lower tax jurisdiction.
Among the legislative amendments under consideration, Mr Tomasek said, was to make it compulsory for multinational enterprises to maintain transfer pricing documentation. This was a growing trend internationally.
Also under consideration was the creation of a legal framework for advance pricing agreements with corporate taxpayers. This would provide for an upfront agreement between SARS and companies on the methodology to determine the price of goods and services sold across borders within a group.
Mr Tomasek said this would "alleviate the enforcement burden and encourage compliance".
Contrary to the EFF’s view, he said, transfer mispricing was not concentrated in the mining sector, which "is no different to any other sector and the industry is not the sole cause for concern".