Just under 30 years after transfer pricing was legislated in section 31 of the Income Tax Act, the first transfer pricing case was decided by the Tax Court.
In ABD Limited v Commissioner for the South African Revenue Service (14302) [2024] ZATC 2 (14 February 2024) (“the ABD-case”), the Tax Court ruled in favour of the taxpayer after considering extensive expert witness submissions.
Prof. Zeyn Mia acted as Accounting Counsel and Prof. Leo Luvuno acted as Commercial Counsel for the presiding officer, Judge Norman Manoim, appointed Judge of the High Court of South Africa and Judge President of the Competition Appeal Court. These specific mentions are important as it demonstrates the intricate and subjective nature of transfer pricing and the dependency on the commercial and accounting elements relating thereto.
At elementary level, transfer pricing is the price that one entity (e.g. Offshore Co) charges another related entity (e.g. SA Co) for goods and / or services, whilst forming part of the same group of companies or are otherwise associated or connected with each other and are situated in different countries. Transfer pricing requires an “arm’s length” price to be charged, i.e. the price what would have been charged between two independent companies. Without transfer pricing applying, the price charged can be manipulated within the group to minimise the tax liability in a specific jurisdiction, or in both (e.g. inflated interest charged on loan accounts or management fees which are not commercially justified), leading to the erosion of the tax base(s).
For taxpayers wishing to invest or diversify their portfolios offshore, transfer pricing rules would apply by virtue of, as an example, capitalising the trust and / or company in another jurisdiction with a loan. Depending on the nature of the investment(s) and / or business portfolio(s), the following stems from the ABD-case in determining the “arm’s length” price charged:
- The T’s and C’s of each transaction’s contract(s);
- The assets deployed and risks assumed in each transaction;
- The characteristics of the property transferred in each transaction;
- The economic circumstances of the parties involved in each transaction;
- The business strategies pursued by the parties involved in each transaction.
(our emphasis)
Transfer pricing is a super-specialty in income tax and therefore a holistic approach is not recommended. Different methods for different industries and transactions exist, and therefore the due care and diligence in the form of expert advice should be taken prior to implementation. It may also be worth considering a transfer pricing policy as a guideline and roadmap for employees.
Although we are not transfer pricing specialists, the ABD-case is far-reaching and provides guidance in navigating conversations with our clients. Please reach out to us should you have any questions relating hereto. Where applicable, we will refer you to trusted service providers.
Contact: Suzanne Smit at suzanne@fidelisvox.co.za for assistance in this regard.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)