The 'Tax Cost' of Cross-Border Use of Intellectual Property: A South African Perspective on Transfer Pricing

• Citation: (2024) IPLJ 30
• DOI: https://doi.org/10.47348/SAIPL/v12/a2
• Published date: 27 January 2025
• Pages: 30-56
• Author: Gutuza, T.
• Date: 27 January 2025

30

https://doi.o rg/10.4734 8/SAIP L/v12/a2

THE ‘TAX COST’ OF CROSS-

BORDER USE OF INTELLECTUAL

PROPERTY: A SOUTH AFRICAN

PERSPECTIVE ON TRANSFER

PRICING

1

Associate Professor, University of the Witwatersrand

ABST RACT

IT 14 302          

the substant ive application of the tr ansfer pricing pr ovisions in the Inc ome Tax Act.

The decision add resses the application of the tr ansfer pricing provisions to cro ss-border

                 

a South Afric an company. The art icle considers the use of t erminology su ch as brand,

goodwill and i ntellectual p roperty by t he parties and t he court in de termini ng the tax

liability of the t axpayer and second, the ap plication of the transfer pr icing methodologies

to determi ne the arm’s length price for the ‘good’ lice nsed by the South Africa n taxpayer

company to its ass ociated foreign subsidiar ies.

KEYWORDS: Transfer pr icing, intellect ual property, goodw ill, brand, arm’s length p rice

  

The distinctions b etween a brand, goodwil l and intellectual prop erty have

implications for the rights and obligations b etween parties, i n particular i n

determin ing the applicable law and consequences. Sim ilarly, the difference

between these concept s is important in deter mining the tax liability of pa rties.

The tax liability, and tax c onsequences, of parties d iffer if the proceeds or

payments are for a brand, goodw ill, intellectual property or t he licence to use

such brand, goodwill or i ntellectual proper ty. In addition, certa in provisions

of tax law might require the de termination of the ‘ar m’s length price’ when

intellectual prope rty is sold or when a party licences the us e of its intellectual

property to a nother party. This deter mination of the ar m’s length price

becomes even more import ant when companies, that are associated with ea ch

other, enter into cross-border t ransactions wit h each other. The importan ce

arises because of the pos sibility that associated compa nies may manipulate

the price in order to reduc e the tax liability of the gr oup of associated

companies. Where a t ax administration contests t he price or payment in such

scenarios, the ta x administ ration may adjust such prices and pay ments to

          

       

    

(2024) IPLJ 30

© Juta and Company (Pty) Ltd

https://doi.o rg/10.4734 8/SAIP L/v12/a2

determinat ion by a South African cour t came before the Tax Court in the

Gauteng Local Division.1 The Tax Court had to dete rmine whether the Sout h

African ta x administration price adjust ment was correct and in doing so, had

to consider whether the dispute d fee was consideration for the use of a brand ,

goodwill or intellectual property.2 The Tax Court also had the oppor tunity

to consider the application of the methods us ed to determine a rm’s length

prices for licensing intellect ual propert y. It is not the intention of this article

to consider the substantive legal dif ferences between the concepts of a brand,

goodwill, intellect ual property a nd the licensing of the latter, but to consider

the background to the t ax treatment of cross-bord er transactions i nvolving

these concepts, and the i mportance of the use of the te rminology such as a

brand, goodwill, a nd intellectual proper ty in licensing ag reements. The role

of such terminology gain s importance when t he arm’s length price of a good

or service must be deter mined in cross -border transac tions and the use of

the property is l icensed to another par ty. The objective of the article is to

consider the application of the aforementioned ter minology, particularly, the

Tax Court’s reliance on the contracts bet ween the parties to categor ise the

income, in the light of exper t evidence in determ ining the ar m’s length price.

         

use of intellectual prope rty in cross-b order transact ions. It will then provide

a brief overview of the concepts of brand, goodw ill and intellectu al property

and then consider the application of these conc epts in the tran sfer pricing

dispute between the t axpayer and the South Afr ican tax admi nistration in

IT 14302.3

As IT 143 02             

before a court in South Af rica, the concept ual ideas are impor tant for those

involved in the cross-border licensing of intellec tual propert y. The case is

also importa nt as it sets out the methodology and thought proce ss used to

determine t he arm’s length price between ass ociated companies, giving some

guidance for fut ure transfer pricing d isputes. It is in this context that th is article

considers whether the reliance on a c ontract, instea d of a functional analysis,

is appropriate to deter mine whether the ‘good’ in the transfer pricing analysis

is a brand, goodwill, i ntellectual property, or perhaps even a combination.

1 IT 14 302 , available at https://www.sars.gov.za/wp-content/uploads/Legal/Judgments/TC/

Legal-DRJ-TC-2024-02-SARSTC-14302-IT-2024-ZATC-JHB-14-February-2024.pdf (hereinaf ter

referred to as I T 1430 2). The Tax Court w ill be referred to a s a ‘court’ throug hout this art icle even

though Poulter v CSARS, case no. A88/2023, available a t https://www.sars.gov.za/wp-c ontent/

uploads/Legal/Judgments/ HC/Legal-DRJ-HC-2024-11-Poulter-v-CSARS-A88-2023-2024-

ZAWCHC-97-2-April-2024.pdf questione d the status of a Tax Cour t.

2 See the Income Tax Act 58 of 1962 (herei nafter refer red as the Sout h African In come Tax

Act) where s 31 provides for the tax t reatment of cross-borde r transactions bet ween associated

companies.

3 IT 14 032 (n 1).

THE ‘TAX COST’ OF CROSS-BORDER USE OF INTELLECTUAL PROPERTY:

A SOUTH AFRICAN PERSPECTIVE ON TRANSFER PRICING 31

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