How SARS should deal with intellectual property transfer pricing

On 27 December 2018, Judge Dennis Davis (the head of the now defunct Tax Committee) again prioritised intellectual property transfer pricing – apparently, transfer pricing contraventions are costing the fiscus R7 billion per year. But how does SARS / Treasury fix this? It’s time to peak out of the box – beyond: employ more tax auditors, increase training, bolster legislation.

The SARS transfer pricing team was never large. During my tenure as the intellectual property specialist at the SARS Large Business Centre (Special Projects team), the transfer pricing team consisted of about 15 specialists. All these people have since left / been “encouraged” to leave. Would they return? Unlikely. Tom Moyane may be gone, but in the end it was SARS – the institution – that let them down. SARS still has a handful of transfer pricing auditors, but the churn rate ensures that none of them remain to see a Court case through to completion. Taxpayers know that the best defence in a tax litigation case is delay – newly assigned SARS auditors picking up an old case don’t receive credit for a case won; but become notorious for a case lost. There is no up-side for shepherding an adopted case through the lengthy Court process. Mr Chipps, who pursued Dave King for 12 years until just before his death, aged 83, was an exception – an exceptional exception. But, Mr Chipps only remained at SARS until his dying day because he knew that upon retirement, the case would be “settled”.

It is also not realistic to expect SARS to “train” new transfer pricing recruits within a year or two – transfer pricing contraventions are not “text-book”. Multinationals ensure that they tick the textbook tick-boxes. And, it takes an auditor with deep knowledge to penetrate the smoke and mirrors. Historically, SARS has focussed on tackling intra-group “management fee” payments – these are simple and straight forward. But, transactions involving intellectual property and derivatives have remained in SARS’ peripheral vision.

So, practically what can one do?

The simple and highly effective answer is: hold “specialist” advisors to account.

Multinationals need to prepare transfer pricing documents. For this, companies engage “specialists” to determine arm’s length royalty rates in licensing transactions. One South African firm has historically overvalued royalty rates (and, consequently, intellectual property values) by 3000%. Seriously, after reviewing and “revising” dozens of “valuation reports” / “royalty determination reports”, this firm “on average” was found to have converted a R1m royalty / value into a R30m royalty / value. And, what did SARS do? Nothing. SARS merely tackled each taxpayer separately. And, what has this firm done since? Continued to issue reports. Why? Because companies know they won’t get a more favourable report elsewhere, and a favourable transfer pricing report is highly profitable for the firm.

Sure, SARS needs to augment its transfer pricing team; the team needs to be trained; training will take years. But, even then, a tripled / quadrupled team can only take on so many cases a year – transfer pricing Court cases typically take about 8 years. On the other hand, if SARS holds “specialists” to account for their transfer pricing reports, SARS’ effective transfer pricing “team” will be increased by an order of magnitude, as the “specialists” / auditors will start doing the work they are supposed to be doing – determining a genuine arm’s length consideration. And, all this would be accomplished without litigation.

Anthony van Zantwijk

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