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Three consequences you'll face if SARS catches you for transfer pricing

by , 17 July 2013
Transfer pricing is the adjustment of intergroup prices of goods and services charged by affiliated companies in order to take advantage of the different tax rates found in different countries. SARS frequently suspects this of being a method of evading national taxation and customs duties. So any related activity around such transactions will attract its attention and scrutiny. Here are the three consequences you'll face if you're caught for transfer pricing.

The SARS transfer pricing unit, based at the Corporate Tax Centre in Megawatt Park, is a sophisticated and vigilant new weapon in the SARS armoury.

'Your main aim in determining and documenting your transfer prices should be to convince the Commissioner that your transfer prices are legitimate arm's length transactions,' says the Practical Tax Loose Leaf Service.

If you're not compliant and SARS catches you of transfer pricing, you'll face the following consequences.

Steer clear of transfer pricing or face these three consequences

Consequence #1: If the SARS Commissioner detects any discrepancy in the pricing and suspects transfer pricing, he'll adjust the consideration or price for tax purposes. This adjusted amount is then used to determine the taxable income of the parties to the transaction, which affects the amount of tax due. And the tax burden will have to be paid within the appropriate jurisdiction.

This can have a significant impact on your bottom line tax bill as different jurisdictions impose different rates of tax.

Consequence #2: Section 31 of the Income Tax Act, which governs transfer pricing, doesn't specifically impose penalties for non-arm's length transfer pricing practices. However, many of the punitive provisions of the Income Tax Act could be thrown at you, including:

  • Section 75, which governs penalty on default;
  • Section 76, which imposes additional tax in the event of default or omission on your part
  • Section 104, which details offences and penalties; and,
  • The general provisions that impose interest on any underpayment of tax due to the default, evasion or omission on your part.

Consequence #3: If you fall foul of the transfer pricing provisions, you can be sure that the assessors will be scrutinising your tax returns with increased diligence in the future!

Remember, every action has a consequence. If you're caught for transfer pricing, SARS will impose harsh penalties.

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