By Owen Murphy, Head of Africa Desk at BDO South Africa
Although South Africa introduced Transfer Pricing legislation in 1995, in the 21 years since, there has not seen a single court case. A reason for this is that many cases are fact specific, complex and both SARS and the taxpayer wants to reach a settlement, thereby avoiding expensive and protracted litigation.
Other revenue authorities are not necessarily as willing to entertain settling, which has led to a number of high profile companies accessing the courts over transfer pricing disputes. A recently reported Australian case (2015), Chevron Australia Holdings Pty Ltd v Commissioner of Taxation illustrated the complexities which lasted five weeks, and the judgment of Robertson J extended beyond 200 pages. A report on the case said the following:
There was a large amount of expert evidence on both sides, with some witnesses giving multiple reports challenging the assertions made by experts on the other side. In total, there were 19 expert witnesses (12 for the taxpayer, seven for the Australian Tax Office (ATO)) and 45 reports from the experts. The cost of the litigation is enormous, with the ATO cost alone in out-of-pocket expenses for experts and lawyers being AUD 10m to date, not including ATO staff costs.
The Australian Tax Office unsuccessfully argued that the adjustment to the profits of the two companies was done pursuant to article 9 of the Double Tax agreement (DTA) between the USA and Australia which requires the allocation of profits between associate enterprises to be done at arm’s length. In other words, they argued that the case involved the interpretation of the Double Tax Agreement and not Australia’s transfer pricing legislation. Chevron lost the case and its total tax bill amounted to approximately AUD 300 million, which includes a penalty of 25%.
In South Africa, SARS has as of late been less reluctant to settle cases with taxpayers and where they were prepared to settle, the terms have been less favourable. A high profile transfer pricing dispute is currently underway between SARS and Kumba Iron Ore (Kumba), as reported in the press recently:
The South African Revenue Service (SARS) slapped the company’s subsidiary, Sishen Iron Ore Company (SIOC), with a secondary claim of R1 billion for the 2011 financial year, bringing the company’s total tax liability to R6.5bn since 2006.
The R1bn bill follows the hefty R5.5bn claim SARS issued against the company for the financial years between 2006 and 2010 for SIOC’s overseas sales and marketing business, to which Kumba objected. The liability included R3.7bn in interest and penalties.
The Kumba case deals with the disallowance of sales commissions paid to an offshore marketing subsidiary of Kumba. If the company is resident in a country with a Double Tax Agreement with South Africa, then it may be possible to approach the foreign country’s tax authorities for a corresponding adjustment. DTAs do not provide for interest and penalties and it is generally accepted that they do not create tax, but allocate existing taxing rights. If these transfer pricing disputes could be seen to involve an argument over which party to the DTA has taxing rights, then the imposition of penalties, and perhaps interest could also be challenged.
In a recent South African case that also involved the interpretation of a DTA and taxing rights (CASE NO: 13276 AB LLC and BD Holdings LLC vs the Commissioner of SARS, as yet unreported), the court upheld a penalty imposition of 100%. The court disagreed with the taxpayer’s argument that it had not intended to avoid the tax but had merely misinterpreted the law in good faith. The court noted:
The appellant must accept responsibility for its own error regardless of whether the error was bona fide or not. In these circumstances, it cannot be held that the respondent acted erroneously, or failed to exercise his discretion judiciously, when only waiving part of the additional tax he was entitled to impose, or that the imposition of the additional tax at all was unduly harsh. The appellant benefitted significantly from the waiver granted by the respondent. In my judgment, taking the waiver into account, it cannot be said that the additional tax imposed is disproportionately punitive. I find no fault with its imposition. Hence, its appeal against the additional tax must fail.
It remains to be seen who will be the first to take SARS to court in a transfer pricing dispute, but it seems that that day is not far off.
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