South Africa


  • Service: Tax, International Corporate Tax
  • Type: Business and industry issue
  • Date: 2010/07/02

Transfer pricing in a recession 

Leading economists have called the financial crisis of 2007 to 2010 the worst financial crisis since the Great Depression of the 1930s. Almost all major industries were affected by the crisis and the effects have been felt around the world.

The impact in South Africa was initially not as severe as the rest of the world.  Risks were mitigated by South Africa exchange control regulations. These regulations which are an administrative burden for any business with international transactions, limit the free flow of currency. However they helped to ensure that South African banks had very limited exposure to the toxic assets because they could not lend or borrow freely with other international banks.


But this was not enough because the lack of freely available credit and knock on effect of various multinationals folding and the slowing down of investment in emerging markets caused the South African economy to fall into recession for the first time in 17 years.


The South African Revenue Service (SARS) has also felt the effects and now has a budget deficit. This has caused SARS to become increasingly focussed on collecting, with specific emphasis on transfer pricing.

Transfer pricing does not take into account extreme changes in the economy and relies on stable information in a number of different areas to give a reasonable result.


The unusually quick impact of the economic crisis has made any information available for transfer pricing irrelevant. In transfer pricing most information sourced from databases is already lagging a year behind and this makes comparable data almost unusable.


This article identifies some of the challenges that recessions create for transfer pricing systems and shows how extraordinary circumstances requires extraordinary answers.


Using previous recessionary data


Until today, accounting in benchmarking studies for recessions has been a largely unknown territory. New approaches could include conducting data searches not in the most recent years, but in recession years, for instance 2000 to 2001 in the European Union. A modification of this approach would focus on the relative difference between margins earned in recessions and boom years. These approaches assume that the only difference between the planning period and the recession is the recessionary environment, but that everything else remains equal. Such an assumption may be difficult to maintain in light of new markets, new customer groups, new products, new production processes, etc. Moreover, the signs are that the current recession is significantly more severe than the downturn at the beginning of the decade. Therefore, another approach that combines the most recent benchmarking data with the tested party’s planning data would be to adjust the benchmarking data for the tested party’s expected sales and operating costs.


Year-end or price/profit adjustments


Year-end or price/profit adjustments are usually performed to bring the company in line with the global transfer pricing policy. The company may have overperformed, resulting is excess profit available, or underperformed, thereby needing to increase profit.


While year-end adjustments may be legitimate commercial considerations by the taxpayer, such adjustments may have costly tax effects, especially if it can be demonstrated that these are transfer pricing adjustments. In terms of the South African deemed dividend rules, the amount that represents additional taxable income or reduced assessed loss of a company by virtue of any adjustment made in accordance with the transfer pricing provisions is deemed to be a dividend declared by that company to such shareholder, making it subject to secondary tax on companies at a rate of 10%. In addition, the Commissioner is also entitled to impose penalties of up to 200% on the underpayment of tax, together with interest. These adjustments could also lead to customs and VAT exposure if an adjustment is made to the selling price. Adjustment should be carefully considered and all taxes should be taken into account when coming to a conclusion.


Resources used:
Tax Planning International
Statistics South Africa