South Africa Advance Pricing Agreements – Discussion Paper

Published by SARS

Multi-national enterprises (MNEs) play important roles around the world and even more so when they invest in developing countries (like South Africa), which need foreign direct investment as a means to grow their economies and lift the majority of their populations out of poverty.

MNEs are generally driven by a profit motive, which may result in them engaging in harmful practices that erode the tax bases of developing countries through transactions that are not at arm’s length and complex and time consuming to audit. According to the OECD’s 2017 Transfer Pricing Guidelines for MNEs and Tax Administrations –

“[t]ransfer prices are the prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises.”

By way of a simple example, an MNE with a subsidiary in a developing country with a high corporate income tax rate and another subsidiary in another country with a low corporate income tax rate will seek to move revenue, through inflated management or other service-related fees, from the subsidiary in the developing country (tax deduction that reduces taxable income at high tax rate) to the subsidiary in the other country (income taxed at low tax rate). In another example relating to the same group structure, the subsidiary in the developed country will sell machinery and equipment at inflated prices (sales income taxed at low tax rate) to the subsidiary in the developing country (excessive depreciation or wear and tear tax deductions reduce taxable income at high tax rate) and the subsidiary in the other country will sell raw materials and mineral extracts at low prices (low taxable sales income at high tax rate) to the subsidiary in the developed country to on-sell to the rest of the world at market-related prices (high taxable sales income at low tax rate).

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