The comparability challenge in South African transfer pricing

transfer pricing 103By AJ Jansen van Nieuwenhuizen

A key aspect of transfer pricing is the determination of an arm’s length or market related price. A common approach is to establish a range of profit margins through benchmarking against comparable companies’ financial data and the profit margins that they earn. One of the challenges for taxpayers in South Africa (and other developing countries), is that besides for listed companies, there is very little publicly available company financial data. The OECD recently produced a paper on “Transfer Pricing Comparability Data and Developing Countries,” in response to concerns about the lack of availability and the poor quality of comparable financial data that many developing countries have access to.

The document offers four alternative approaches to addressing these concerns, namely:

•Expanding access to sources for comparable data;
•More effective use of comparable data sources for and guidance on making adjustments;
•Approaches to reducing reliance on directly comparable data, including the use of safe harbours;
•Advance pricing agreements and mutual agreement proceedings.
The document suggests 15 possible actions within these four approaches, but does note that given the long list of possible actions, there should be some prioritisation of those actions based on country needs and the availability of resources.

Broadly speaking, we feel that the document is a good first attempt to address the comparability issues that are likely to arise over the next few years. As most developing countries do not have mutual agreement proceedings, multinational groups operating in developing countries who have pricing disputes have an increased risk of double taxation due to their relatively limited double tax treaty network – guidance from the OECD to multinational groups and tax authorities alike should be welcomed.

What does this mean for you?
The document should not be considered a relaxation in the transfer pricing approach or level of focus from revenue authorities in developing countries. On the contrary, a more certain environment will create a stronger platform from which revenue authorities can conduct their audit activities. Multinationals should therefore take advantage of the opportunity to proactively determine their transfer pricing position and ensure that they have transfer pricing policies in place, that are both commercial and provide appropriate defence in the case of a query from a revenue authority. We would be pleased to discuss this with you in more detail.