Translation of transfer pricing adjustments in South Africa: A seemingly insignificant detail

• Citation: (2023) 35 SA Merc LJ 190
• DOI: https://doi.org/10.47348/SAMLJ/v35/i2a4
• Published date: 26 March 2024
• Pages: 190-212
• Author: van Heerden, M.
• Date: 26 March 2024

TRANSLATION OF TRANSFER PRICING

ADJUSTMENTS IN SOUTH AFRICA: A

SEEMINGLY INSIGNIFICANT DETAIL

MICHELLE VAN HEERDEN*

Senior Lecturer, Department of Accountancy, University of Johannesburg

Abstract

The South African rand is one of the most volatile currencies in the

world — at times the most volatile. To this is added a further area of

uncertainty, namely the tax implications relating to transfer pricing.

Section 31 of the South African Income Tax Act does not have any

specific foreign currency translation rules. The general rule in s 25D of

the Income Tax Act is therefore applicable, which provides for the

translation of foreign currency to rand using the spot rate. However,

given the nature of transfer pricing transactions, it raises the question

whether the spot rate is indeed appropriate. The purpose of the study

was to investigate South Africa’s translation rules and to seek guidance

from an international perspective. The research design was

non-empirical, adopting an interpretative paradigm, together with a

doctrinal research methodology. The conclusion of this study is that the

translation rules concerning transfer pricing adjustments have

seemingly been overlooked. The study recommends a legislative

amendment of s 31 and proposes that transfer pricing adjustments are

converted using the average rate of exchange for the year of assessment

to which the adjustments relate, as such an amendment will lead to

certainty, equity and convenience.

Keywords: translation, foreign currency translation, transfer pricing,

transfer pricing adjustments

I INTRODUCTION

Transfer pricing has arguably been one of the most debated topics in the

f‌ield of taxation for more than a decade. After the f‌inancial crisis in 2008,

the G20 countries placed tax at the top of their agenda, specif‌ically

*BCom Accountancy, BCom Honours Accountancy, MCom South African &

International Tax (RAU).

190

https://doi.org/10.47348/SAMLJ/v35/i2a4

(2023) 35 SA Merc LJ 190

© Juta and Company (Pty) Ltd

combating tax evasion and tax avoidance.

1

The discussions and debates

among the G20 countries led to, inter alia, the now commonly used

acronym BEPS (base erosion and prof‌it shifting).

It is commonly accepted that BEPS emanates from multinational

companies eroding the tax base of a high-tax jurisdiction through prof‌it

shifting to low- or no-tax jurisdictions. BEPS involves tax planning

strategies where gaps and mismatches in tax rules between various

jurisdictions are exploited. It typically involves artif‌icial schemes and

structures where prof‌its are shifted to the low- or no-tax jurisdiction

where there is little or no economic activity. Although some of the

schemes and structures are illegal, most of them are not.

The Organisation for Economic Co-operation and Development

(OECD) is conducting extensive research work and projects on BEPS,

giving rise to numerous documents and guidelines. According to the

OECD, the impact of BEPS on developing countries is much more

severe than on developed countries. The OECD cites the heavy reliance

of developing countries on corporate income tax, particularly from

multinational enterprises, as its reason.

2

South Africa is not a member of the OECD but does have observer

status as one of f‌ive key partners.

3

On 11 January 2019, the OECD, the

South African Revenue Service (SARS) and the National Treasury

strengthened their tax cooperation by signing a memorandum of

cooperation, agreeing to continue to work together in taxation. This

memorandum was in place until December 2023. A media release by

SARS conf‌irmed that the three parties have had a long history of

collaboration and stated that ‘the memorandum provides for the

continuation of such co-operation towards the achievement of the

common objective of ‘‘promoting fair and efficient tax systems and

administrations’’’ (emphasis added).

4

It is submitted that this common objective of promoting fair and

eff‌icient tax systems and administrations is in line with the four pillars a

good tax system should encompass, as envisioned by Smith, an economist

1

Organisation for Economic Co-operation and Development (OECD), ‘What is BEPS?’

(2019) available at https://www.oecd.org/tax/beps/about/#tools, accessed on 23 February 2020.

2

OECD, ‘What is BEPS?’ (2019).

3

OECD, ‘South Africa and the OECD’ (2007) available at https://www.oecd.org/

souathafrica/south-africa-and-oecd.htm, accessed on 20 February 2020.

4

South African Revenue Service (SARS), ‘OECD, SARS, and National Treasury continue

partnership to strengthen tax co-operation’ (2019) available at https://www.sars.gov.za/

media-release/oecd-sars-and-national-treasury-continue-partnership-to-strengthen-tax-co-

operation/, accessed on 24 February 2020.

https://doi.org/10.47348/SAMLJ/v35/i2a4

TRANSLATION OF TRANSFER PRICING ADJUSTMENTS IN SOUTH AFRICA191

© Juta and Company (Pty) Ltd