The transfer pricing implications of hard-to-value intangibles : challenges and recommendations

Abstract

It has been noted with concern that multinational companies (MNC's) have been engaging in base erosion and profit shifting that has resulted in the significant loss of tax revenue. Developing countries are the most affected and as a result there has not been sufficient funding to enable the implementation of poverty-alleviating projects. This study was conducted based on a literature review that entailed an analysis of specific newspaper, academic and journal articles, textbooks and publications by the Organisation for Economic Co-operation and Development (OECD) and the United Nations (UN), relating to the transfer pricing of hard-to-value intangibles. International case law was also analysed to evaluate some of the factors considered by the courts in deciding the allocation of returns arising from intangible assets as well as the factors considered in the determination of an arm's-length price. It was noted in this study that MNC's have employed various techniques that have resulted in the shifting of profits from high to low tax jurisdictions. It was also found that there are conflicting views between the OECD and the courts on how allocation of returns arising from hard-to-value intangibles based on ownership should be performed. Several challenges relating to the arm's-length principle were noted. These challenges include comparability of transactions, the lack of resources, and the shortage of appropriate transfer-pricing skills, especially in developing countries. The following recommendations were put forward as a result of this study: the need for pro-activeness by tax authorities in detecting schemes employed by MNC's, the incorporation of limitation of benefit clauses in South African treaties with other countries, laws that prevent audit firms, specialist tax advisory firms as well as law firms from assisting MNC's in shifting profits by engaging in impermissible avoidance arrangements, amendment of legislation to impose transfer pricing penalties in addition to understatement penalties, greater co-operation among countries with regard to the exchange of information, as well as the training and up-skilling of the South African Revenue Service (SARS) staff.