Roxanna Nyiri, Director of International Tax and Transfer Pricing at BDO South Africa
In the recent wake of the most extensive and equally smearing leak of financial documents ever – The Panama Papers - the spotlight has been cast on the issue of transfer pricing, with many affirming it as a legitimate way of tax avoidance for international trading companies. Fast-moving changes and significant regulatory developments within international tax law have made the topic of transfer pricing the subject of sometimes unwanted – and at times unwarranted - controversy. Delving deeper into this subject matter, Roxanna Nyiri, Director of International Tax and Transfer Pricing at BDO South Africa, shares insights on international taxation laws and the impact on compliance and inter-continental business operations.
Globalisation and the continued growth of international trade have made inter-company pricing an everyday necessity for many businesses. In every sense, companies continue to rapidly grow their businesses across borders in the pursuit of new and better opportunities. This is especially true for South Africa in light of the current economic climate. Local companies are constantly seeking ways to externalise their businesses in the most efficient and legitimate manner, primarily with the view to retain hard currency out of the country.
This is also true for the pricing of transactions between cross-border group companies, commonly referred to as Transfer Pricing. From a financial perspective, transfer pricing is probably the most important global tax issue today.
The impact of increased focus on Transfer Pricing in recent times has created a rather uncertain operating environment for businesses, many of which are already contending with intensified global market pressures. Other considerations have also had an influence on the current importance of Transfer Pricing. Some developed countries tightened their transfer pricing legislation to address the issue of foreign enterprises active in their countries that are paying lower tax than comparable domestic groups. Consequently, some developing countries have introduced equally challenging Transfer Pricing regulations in their countries to keep their tax bases intact.
According to Nyiri, “for certain companies, Transfer Pricing is used as a mechanism to structure transactions in such a way that high value activities, assets used and risks assumed are positioned in low tax paying countries, however without the required economic substance and effective management and as such is usually viewed by many as a measure to avoid taxes.” With the ongoing debate surrounding such companies who use structuring arrangements to avoid paying tax, it has become even more important to examine possibilities to curb the tide of tax non-compliance.
In the South African context, the country has made great strides in the introduction and amendments to regulatory changes in the area of Transfer Pricing. “Locally, Transfer Pricing now covers every business transaction, operation, scheme, agreement or understanding - whereas previously it only applied to the transfer of goods and/or services. The safe harbour for thin capitalisation has also been removed and is now governed by the arm’s length principle, which directs that parties involved in a transaction are independent and are on equal footing.”
With every accomplishment there remain obstacles to reporting standards. It is important to note that there are still a number of challenges facing multinational companies in preparing documentation to demonstrate compliance with Transfer Pricing rules. Even though companies have Transfer Pricing documentation in place, governing policies may not have been implemented properly. With the introduction of country-by-country reporting as announced in the Budget Speech and draft regulations recently released, it is prudent for companies to have the IT systems in place to capture financial data of their group companies across the globe, which is costly and time consuming.
For developing countries that lack the administrative resources to challenge well-represented multinationals, Transfer Pricing has a major effect on country budgets. This is because Transfer Pricing documentation studies can be very costly and, with the introduction of country-by-country reporting, this burden is further amplified.
There is, however, an ideal economic answer to address processes that can benefit both company and state. Through aggressive audits and raising of assessments, tax authorities have a bigger role to play in contributing to the increase in the number of transfer pricing disputes globally.
“Additionally, a mechanism that could assist is Advanced Pricing Agreements (APAs), where the South African Revenue Service (SARS) agrees to the pricing of transactions in advance and this ruling would then be binding for a couple of years. This would help both SARS and the taxpayer find a common platform and reduce uncertainty,” concludes Nyiri.