Clamour to end transfer pricing abuse

transfer pricing 102Author: Linda Ensor (BDlive)

Pressure is mounting both within and outside Parliament for the government to introduce dedicated legislation to ban transfer pricing when it is used as a tax-avoidance measure to shift profit offshore.

South Africa is estimated to lose tens of billions of rand annually from the abuse of transfer pricing by multinational groups, but South African Revenue Service (SARS) large business centre group executive Sunita Manik said on Wednesday that transfer pricing itself was accepted practice globally and could not be banned.

One way in which transfer pricing can be abused is when a local company sells its goods or services to an offshore associate in a low-tax jurisdiction, or sells them at a marked discount.

“The issue with transfer pricing is that it is not outright illegal, though increasingly a lot of it is becoming morally reprehensible,” Ms Manik said.

“It allows the movement of goods or services within a multinational group. The unacceptable aspect is that it allows multinationals to push a lot of money from high-tax to low-tax jurisdictions,” she said.

The only way to act against the abuse was through tax legislation and audits, which SARS undertook as international best practice, and which it followed closely.

The tax review committee headed by Judge Dennis Davis has also been given the task of investigating whether the current legislative regime governing profit shifting is appropriate or not.

Profit shifting is a way of maximising profit within a group, but deprives the South African fiscus of its proper due in taxes. It is regarded as an aggressive form of tax avoidance by SARS.

Economic Freedom Fighters (EFF) MP Floyd Shivambu called for a “comprehensive and clearly articulated law which forbids transfer pricing” during a beneficiation colloquium of Parliament’s portfolio committee on trade and industry.

His views were supported by African National Congress (ANC) MPs, who called for urgent action.

EFF leader Julius Malema threatened to mobilise communities and workers to march on mining companies that were engaging in the practice.

South African Mining Development Association president Bridgette Radebe also called for tougher action. She said the practice of moving profits offshore deprived black economic empowerment partners in mining companies of their rightful share of their companies’ profits and dividends, and undermined their ability to repay loans.

In this way the goal of achieving 26% black ownership in mines had been undermined and empowerment policy was being “sabotaged”.

Ms Radebe said she had the names of mining companies that were engaged in profit shifting, and urged that an investigation be undertaken. The government should also use the Mineral and Petroleum Resources Development Act to determine the true value of commodities being transferred.

Ms Radebe said legislation needed to be tightened.

It should not be left to auditors to decide when abusive transfer pricing was taking place.

Mr Shivambu slammed the government as being “extremely weak” in not implementing laws. “Laws are being broken and no one is doing anything about it.”