The untested waters of transfer pricing disputes – Lexology

Tackling base erosion and profit shifting remains a priority for the National Treasury and the South African Revenue Service (“SARS”). It was recently reported that in the 2021 fiscal year, SARS dealt with 345 cases of transfer pricing, base erosion and profit shifting to the value of almost ZAR12-billion.

Yet, only three South African courts have dealt with transfer pricing. In none of these cases, however, was it necessary for witnesses to testify about the impugned transaction. It follows that this limited transfer pricing jurisprudence does not deal with the evidentiary aspects that may necessarily arise in such a dispute.

A case in point is the evidentiary value of comparable transactions. A comparability analysis typically involves a comparison between the taxpayer’s transaction with third-party transactions which are comparable. Taxpayers usually rely on such a comparison to show that they transacted at arm’s length.

But in transfer pricing matters, SARS often rejects the taxpayer’s benchmarking study (advanced in support of the arm’s length nature of its transaction) and then issues an additional assessment based on its own analysis.

This raises a few interesting questions.