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What is transfer pricing?

by , 27 January 2014
Chances are you've heard of transfer pricing. But, do you know what it really means and how it affects you? Read on as we tell you all you need to know about transfer pricing.

The Practical Tax Loose Leaf Service says that transfer pricing is a red flag for SARS.

'SARS will scrutinise your pricing policy to ensure you aren't trying to pay less tax illegally when you adjust the price of your foreign goods and services,' adds the Loose Leaf Service.

So what exactly is transfer pricing?

Transfer pricing explained

Transfer pricing is the adjustment of intergroup prices of goods and services charged by affiliated companies to take advantage of the different tax rates from different countries.

Caution! SARS often suspects this as a method companies use to evade national taxation and customs duties. So any related activity around these transactions will attract SARS' attention and scrutiny.

If you have offshore operations, such as foreign subsidiaries and foreign holding companies, SARS'll investigate you. It'll specifically take a very close look at your intercompany transactions such as management fees.

Here are the three red flags SARS'll look for when it comes to transfer pricing

#1: SARS'll examine the consideration or price you determine for goods or services you supply between connected parties in a group of companies (for example, a head office and branch, or subsidiary).

SARS does this to check if the actual price is either less or greater than the price that would've been set:

  • If the supply of goods or services happened between independent parties dealing on an arm's length basis; and
  • Without any connection or affiliation to each other within the group.

#2: SARS'll look for times where you work out the pricing of goods or services to try minimise the amount of local tax you have to pay.

#3: It'll also look for companies that shift profits to countries with a lower tax rate.

Some companies manipulate the pricing and values of intercompany transactions to get deductions in the higher tax jurisdiction, while shifting the profits to a lower tax jurisdiction. SARS is aware of these tricks and very good at identifying and blocking them.

Now that you know what transfer pricing is, make sure you comply. Remember, SARS is always watching you.

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