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16 December 2004 Angelo Coppola

The enforcement of tax legislation governing transfer pricing could soon impact on small to medium size multinational companies, warns international accounting firm BDO Spencer Steward (BDO).

"As it has done successfully with large multinationals since the introduction of legislation five years ago, the SA Revenue Service (SARS) is soon likely to turn its attention to the intra-group cross-border economic activity of smaller multinationals," says Roxanna Nyiri, a senior tax consultant at BDO.

Note: Transfer pricing describes the process by which entities belonging to the same multinational set the prices at which they transfer goods and / or services within the group.

The transfer prices adopted by a multinational have a direct bearing on the proportional profit it derives in each country in which it operates.

If non-market value (or inadequate or excessive consideration) is paid for the transfer of goods or services between the member companies of a multinational, the income calculated for each of those members will be inconsistent with their relative economic contributions.

This distortion will impact on the tax revenues of the relevant tax jurisdictions in which they operate.

For example, if a member of a multinational sells to a connected entity resident in a country at a reduced price, the profit the multinational earns in that country is increased.

Says Nyiri: "Since South Africa's re-emergence into the international market, there has been noticeable expansion of international trade and commerce, with wide ranging changes in volume and complexity.

“Increasingly, this international activity is carried on between members of multinationals.

"As global business activity continues to gather pace, protecting the South African tax base is vital to South Africa's wealth and development."

Nyiri says the normal procedure is for multinationals to do a database search to obtain arm's length comparable information, to demonstrate that their prices are market-related.

"This is a very costly exercise, which has had the result of forcing SME multinationals to find other means of setting prices for these goods and services. In addition, the documentation which has to be completed is onerous and time consuming."

Although it is not a member of the Organisation for Economic Co-operation and Development (OECD), South Africa has adopted the internationally-accepted OECD "arms length principle" for transfer pricing taxation purposes.

For its part, BDO has developed a concept based on the OECD's philosophy that SMEs should not have to spend excessively on transfer pricing.

Says Nyiri: "BDO believes that the taxpayer should not have to incur disproportionately high costs and burdens to obtain documentation from foreign associated enterprises or to engage in an exhaustive search for comparable data."

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