A comparability adjustment transfer pricing model
Loots, Jozua Johannes
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The birth of democracy in South Africa on 27 April 1994 brought about irrevocable change. Markets opened up, economic activity and trade accelerated resulting in the South African economy being catapulted into the global market. Globalisation became a reality. Globalisation comprises structural transformation that affects enterprises and countries giving rise to new relationships and interdependencies. Globalisation creates a multiplicity of linkages and interconnections amongst countries and societies that constitutes the present world economic system. The multiplicity of linkages and interconnections aligns the Multinational Enterprise (MNE) as it relates to an integrated production and market network spread over various geographic locations. Historically, South Africa had stringent exchange controls to limit capital flows. Since democratisation in 1994, South Africa introduced transfer pricing legislation to administer transfer prices of goods and services within an MNE. The goods and services transferred within an MNE are not geographically bound and do not necessarily reflect economic market conditions. Hence, the approach used in transfer pricing is to determine the arm's length consideration based on what a willing buyer and seller would do, the market price. To establish the arm's length consideration, comparative benchmarks are used. Comparability, in this context, give effect to "what would have been if a willing buyer and seller" transacted. The concept of "what would have been", the comparative benchmark, could be ambiguous. Ambiguity is the result of the interpretation of "what would have been". In order to minimise ambiguity insofar as comparability, a comparability adjustment transfer pricing model (CATPM) is designed to recognise factors obtained from comparative benchmarks. The CATPM provides greater clarity insofar as the determination of the arm's length consideration. Clarity is achieved despite constraints such as unavailable South African comparable information with inconsistent use of foreign comparable data that results in ambiguous, subjective conclusions on the arm's length nature of transactions.