Addressing challenges facing SARS relating to the application of transfer pricing in business restructurings

Abstract

Multinational enterprises have been widely accused of using aggressive tax planning schemes to avoid paying tax all over the world. The purpose of this study is to analyse the methods used by multinational enterprises in the context of business restructurings to shift profits from high to low tax jurisdictions. Transactions between associated entities have generally been manipulated by applying non-arm’s length prices to these transactions, as well as devising agreements where the economic substance varies from the form of the transaction. The study aims to investigate some of the practical challenges faced by tax administrators in the application of the arm’s length principle. The study was conducted based on a literature review, as well as analysing specific examples reported in newspapers where multinational enterprises have used aggressive tax planning schemes to shift profits. International case law was also analysed to evaluate some of the factors considered by the courts in the determination of the arm’s length price. It was found that multinational enterprises definitely use aggressive tax planning schemes to shift profits. The practical challenges in the determination of arm’s length prices, complexity of the transactions involved, as well as a lack of resources, especially in the developing nations, are some of the factors that cause tax administrators to battle to find a solution to deter and detect these schemes. Other methods such as the unitary taxation method and the country by country reporting concept have been brought forward as alternatives to the arm’s length principle. These alternatives have been proposed in an effort to find a solution to the challenges posed by the arm’s length principle. Specific measures have also been recommended for developing nations’ tax administrators to resolve the issues that they currently experience in this context.