Resources On-Demand

Transfer Pricing: Functional Analysis, Risk Analysis and Compliance

Overview

Group pricing decides which country taxes the profit, and SARS treats cross-border related-party transactions, particularly intra-group financing, as a known risk area. Under self-assessment, the taxpayer must be able to prove that the price is arm’s length. This session sets out the governing framework: section 31 of the Income Tax Act, Practice Note 7, Interpretation Note 127 on intra-group loans, Interpretation Note 128 on associated enterprises, and the OECD Transfer Pricing Guidelines. It covers the scope of an “affected transaction”, the overlapping connected person and associated enterprise tests, and the primary and secondary adjustments, with a worked example.

The core of the session is the functional and risk analysis. It explains the arm’s length principle, the five comparability factors, accurate delineation of the transaction, and how to build a functions, assets and risks profile, including how the same entity can produce two different outcomes depending on who actually controls pricing and strategy. It applies the principle that conduct prevails over contract, the DEMPE framework for intangibles, and the OECD six-step risk framework with its tests of control and financial capacity. These are illustrated through a recent Tax Court decision, an OECD contract-manufacturer example and an OECD group-support example on intra-group loans.

The final part turns to method selection and benchmarking, the self-assessment and documentation framework, ITR14 disclosure and SARS risk profiling, the cost of getting it wrong, interactions with the interest limitation rules, withholding taxes, customs and VAT, and the routes for avoiding or resolving disputes. It closes with a review of South African transfer pricing case law and a practical checklist.

Topics covered

• The framework: what transfer pricing is and why SARS focuses on it, section 31, PN 7, IN 127, IN 128 and the OECD Guidelines
• Section 31: affected transactions, connected persons and associated enterprises, and primary and secondary adjustments, with a worked example
• The arm’s length principle and comparability: the five comparability factors and accurate delineation of the transaction
• Functional analysis: functions, assets and risks, the OECD view, a worked FAR profile, contract versus conduct, DEMPE and intangibles, and the Taxpayer SC case study
• Risk analysis: the OECD six-step framework, control and financial capacity, how risk allocation affects pricing, and the OECD contract-manufacturer example
• Method selection: the most appropriate method, how the functional analysis drives the choice, CUP, resale price, cost plus, TNMM and profit split, and intra-group loans under IN 127 with the OECD group-support example
• Compliance: self-assessment, documentation thresholds, Master File, Local File and Country-by-Country reporting, ITR14 disclosure and SARS risk profiling
• Consequences and disputes: adjustments, understatement penalties and double taxation, interactions with sections 23M and 23N, withholding taxes, customs and VAT, APAs, MAP and voluntary disclosure
• Case law and application: Crookes Brothers, ABC (Pty) Ltd, Taxpayer SC, BASF and ABD Limited, and a practical checklist

Learning outcomes

The deck’s opening slide (“What you will leave with”) sets out outcomes. These are adapted from it.

Practitioners will be able to:

1. Explain what transfer pricing is and why SARS focuses on cross-border related-party transactions
2. Navigate section 31, Practice Note 7, Interpretation Notes 127 and 128, and the OECD Transfer Pricing Guidelines
3. Carry out a basic functional and risk analysis and use it to select the most appropriate pricing method
4. Identify the documentation and disclosure SARS expects, including ITR14 consistency
5. Assess the consequences of non-arm’s length pricing, including adjustments, penalties and double taxation

Who should attend

Tax practitioners, accountants, auditors, in-house tax and finance managers, and CFOs of groups with cross-border related-party transactions.