Transfer pricing litigation in South Africa: A new era of disputes?
Transfer pricing litigation in South Africa: A new era of disputes?
The Western Cape Tax Court’s recent ruling in South African Revenue Service v Taxpayer SC (Pty) Ltd (case 45840) signals a potentially transformative phase for transfer pricing (TP) disputes. This case may embolden the South African Revenue Service (SARS) to adopt a more assertive approach to TP assessments and litigation, particularly where complex structures and offshore intellectual property (IP) are involved.
Case overview
The case concerned SC, a South Africa-based food retailer, which received remuneration for activities performed for SIL, a related party in Mauritius. Under the franchise agreements with non-South African subsidiaries, SIL was contractually responsible for trademarks, know-how, and related intangibles.
SARS audited SC for the 2015 and 2016 tax years and concluded that SC was, in fact, responsible for the strategies driving the group’s expansion into the African market. SARS found that SC determined standards for developing marketing intangibles in non-South African jurisdictions and that SIL’s role was largely administrative – limited to signing franchise agreements drafted and vetted by SC employees.
As a result, SARS adjusted SC’s taxable income, determining that the remuneration received fell below the arm’s-length range under the comparable uncontrolled price (CUP) method. The adjustment added ZAR 118.3 million in 2015 and ZAR 162.3 million in 2016. SC appealed the assessment, arguing that the CUP method was “defective and inapplicable”.
Following SC’s submission of its appeal, SARS filed its statement of grounds of assessment and opposition and subsequently produced an expert report authored by Dr Maning. SC objected to the inclusion of this report, arguing that it not only failed to support the grounds of assessment originally advanced by SARS but appeared to contradict them. On this basis, SC contended that the report had no proper place in the appeal as framed and should be withdrawn.
SARS, in response, applied to amend its Rule 31 statement to incorporate a reference to Dr Maning’s report. It argued that the report provided an additional, alternative method for determining arm’s length compensation, reinforcing — rather than replacing — its original assessment. Conversely, SC maintained that the amendment would amount to a substantive change to the factual foundation of the assessment, effectively requiring SARS to issue revised assessments.
The Tax Court dismissed SCL’s appeal.
Substance over form
While the court did not evaluate which TP method was appropriate, the ruling has notable implications. It permits SARS to amend its Rule 31 statement to introduce another method, despite initially relying on the CUP method. This sets a precedent for SARS to pivot between methodologies during litigation, provided the underlying facts remain unchanged.
Importantly, SARS prioritised economic substance over contractual form, aligning with the functional analysis of how intangibles are developed, maintained and exploited. Despite SIL’s legal ownership of the IP, SARS focused on the actual functions performed by SC in South Africa.
Strategic implications for taxpayers
The judgment affirms SARS’s authority to amend its approach during disputes. This flexibility underscores the importance for taxpayers to be prepared for alternative transfer pricing methodologies being raised in the course of a dispute. Rather than focusing solely on defending their current methodology, taxpayers may need to consider the implications of other potential approaches to ensure a comprehensive response. SARS is also scrutinising offshore IP ownership structures more closely, with Mauritius’s low-tax environment drawing particular attention. This reflects a strategic focus on high-value, IP-driven transactions, which, despite their complexity, may deliver significant adjustments for SARS.
The road ahead
TP litigation in South Africa is “here to stay.” Increased SARS funding and a more dynamic approach to TP assessments suggest further disputes are on the horizon.
This case reinforces that TP is as much an art as it is a science. Different experts can reasonably adopt different views on arm’s-length pricing, and those debates are likely to intensify.
For South African taxpayers, the case underscores the need for robust TP documentation, proactive risk assessments, and close monitoring of offshore IP structures. As SARS adopts a more assertive, substance-driven approach, early engagement and strong technical defences will be essential.
Key takeaways for taxpayers
- Expect increased scrutiny on IP structures, particularly those involving low-tax jurisdictions such as Mauritius.
- Prepare for methodological challenges: SARS may adopt different TP approaches during disputes, so defence documentation should anticipate multiple methods.
- Focus on substance: Ensure intercompany arrangements accurately reflect the actual functions, risks, and assets of each entity.
- Strengthen defences early: Proactive engagement, thorough TP documentation, and readiness for litigation are now essential for managing risk.