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Transfer Pricing in SARS' 5 Year Strategic Plan
The introduction of the new South African transfer pricing rules with effect from 1 April 2012, as well as the repeatedly delayed publication of the South African Revenue Service (SARS) Interpretation Note, has ensured that transfer pricing has been a hot topic of discussion during the last few months. Taxand South Africa explores the new rules and the speculation regarding SARS' view on the application of the transfer pricing principles to intra-group financing transactions in general, (and thin capitalisation in particular).
The speculation surrounding SARS' approach to transfer pricing in future will only subside once the new Interpretation Note on transfer pricing has been published. In the meantime we make reference to SARS' recently issued 5-year Strategic Plan for the period 2012/13 to 2016/17, setting out SARS' mandate, vision, values and core outcomes, as well as its 5-year strategy to achieve these core outcomes.
Independent of the more practical guidance to be provided in the interpretation note though, it is important to understand that transfer pricing is one of SARS' main strategic focus areas for the next few years. Therefore, transfer pricing must be on the radar screen of any tax director who is responsible for a company involved in intra-group cross-border transactions.
In terms of the Strategic Plan, transfer pricing has been identified as one of the main strategic risks currently faced by SARS, due to the growing presence of multi-national corporations in South Africa, the emergence of large local original players and the position of South Africa as an investment conduit into Africa.
Considering the difference in size of the two economies, and South Africa's dependence on foreign direct investment, an aggressive approach similar to the one taken by the Indian tax authorities, which disregards international principles such as the OECD Guidelines, could result in serious damage to be inflicted on South Africa as an investment destination.
While the overall size of the Indian market might be big enough to lure foreign investors, despite the aggressive approach taken by its tax authorities, we are doubtful as to whether the same would apply to South Africa - a substantially smaller and less strategically important market.