Case note: The unfortunate dearth of judicial precedent in transfer pricing continues

• Citation: (2023) 35 SA Merc LJ 74
• DOI: https://doi.org/10.47348/SAMLJ/v35/i1a4
• Published date: 27 February 2024
• Pages: 74-93
• Author: Legwaila, T.
• Date: 27 February 2024

Case notes

THE UNFORTUNATE DEARTH OF JUDICIAL

PRECEDENT IN TRANSFER PRICING

CONTINUES

THABO LEGWAILA

Professor, School of Law,University of the Witwatersrand

I INTRODUCTION

Despite what could be hailed as the f‌irst two transfer pricing cases in

South Africa, the unfortunate dearth of judicial precedent in South

Africa regrettably continues. Transfer pricing is one of the most complex

areas of tax alongside provisions dealing with controlled foreign compa-

nies, foreign exchange gains and losses, currency conversions, f‌inancial

instruments, and corporate reorganisations. In fact, as the list goes on, it

is just more apposite to say ‘tax is complex’, period. With regard to

transfer pricing in particular, the complexity is amplif‌ied by the fact that

transfer pricing is not even tax per se. It is an economic allocation of

contribution through the value chain. It is through transfer pricing that

each contributor in the value chain gets an adequate return for their

contribution in the value chain. Once that allocation is complete, the tax

provisions are applied to the returns of each contributor according to

the tax laws of the countries in which they are taxable.

A transfer price is a price set by a taxpayer when selling to, buying

from or sharing resources with a related person. A transfer price is

contrasted with a market price, which is the price set in the marketplace

for the transfer of goods and services between unrelated persons where

each party strives to get the utmost possible benef‌it from the transaction

(see Arnold & McIntyre, International Tax Primer (Kluwer Law Interna-

tional 2002) 55; Danzinger, International Income Tax (Butterworths

1991) 303–307). Transfer prices are not negotiated in a free open market

and as such have the propensity to deviate from prices agreed upon by

non-related trading partners in comparable transactions under the same

circumstances (Oguttu, International Tax Law: Offshore Tax Avoidance

74

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(2023) 35 SA Merc LJ 74

© Juta and Company (Pty) Ltd

in South Africa (Juta 2015) 213). Unless prevented from doing so, related

persons engaged in cross-border transactions can avoid the income

taxes of a country through a manipulation of prices, mainly by shifting

prof‌its to low tax countries and expenses to high tax countries. To

combat this, tax authorities across the globe have the power to adjust, in

appropriate cases, the transfer prices set by related persons (Arnold &

McIntyre, (Kluwer 2002) 55.

In what can be welcomed as the f‌irst transfer pricing case in the South

African courts, the South Johannesburg High Court had an opportunity

to decide on the applicability of s 31(7) of the Income Tax Act 58 of 1962

(‘the Act’; any reference to a section or subsection are to the Act, unless

otherwise stated, or the context indicates otherwise) to a debt owed by a

foreign company to a South African company. The applicable provision

excludes debt instruments that contain core characteristics of debt

instruments from the application of transfer pricing provisions. In the

second case, the same court missed out on an opportunity to gauge the

legitimacy of the revenue collector to use s 31(2) of the Act to adjust

prices charged between a taxpayer and third parties that are not related

to the taxpayer.

IITHE PROMINENCE OF TRANSFER PRICING IN

INTERNATIONAL PODIA

The Organisation for Economic Co-operation and Development

(‘OECD’) and the United Nations (‘UN’) have taken the lead in assisting

countries in their efforts to eliminate tax avoidance, especially at an

international level, including through transfer pricing. The United

Nations Model Double Taxation Convention between Developed and

Developing Countries (‘UN Model Convention’) and the Organisation

for Economic Co-operation and Development Model Tax Convention on

Income and on Capital (‘OECD Model Convention’) provide a template

for countries to adopt and adapt in their design of bilateral tax treaties.

Indeed there are currently over 3000 tax treaties worldwide, the majority

of which are based on these two model tax conventions (see Brumby &

Keen, ‘Tax treaties: Boost or bane for development’ Insights and analysis

on economics and f‌inance’ https://www.imf.org/en/Blogs/Articles/

2016/11/16/tax-treaties-boost-or-bane-for-development, accessed on

7 February 2023; Arnold, ‘An introduction to tax treaties’ https://

www.un.org/development/desa/f‌inancing/sites/www.un.org.

development.desa.f‌inancing/f‌iles/2020–06/TT_Introduction_Eng.pdf,

accessed on 7 February 2023).

The provisions relating to transfer pricing in both models are

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