Transfer pricing: hearing

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Trade, Industry and Competition

22 April 2015
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Davis Tax Committee, said about three years ago, the South African Revenue Services (SARS) did a very aggressive investigation into transfer pricing and collected R1.1 billion for just that one financial year. This indicated that there was a considerable “haemorrhaging of money”.  It was not only companies that were involved in taking money illegally out of the country. Individuals had also siphoned off money abroad as recent disclosures through the British bank HSBC had revealed. R23 billion of that money was South African money and this was being investigated by SARS. It appeared that Lonmin, learned through disclosures during the Marikana inquiry, had saved about R280 million in taxes through a Bermuda company. SARS lacked the capacity to deal effectively with transfer pricing. SARS was also not provided with sufficient information by taxpayers to allow it to probe cross-border transactions to determine whether it involved the illicit transfer of profits from high-tax to low-tax regimes. The Davis Tax Committee had recommended to National Treasury that the special unit in SARS dedicated to base erosion and profit shifting be strengthened. In its report, the committee had proposed that all companies should have to state whether they had firms in tax havens or low tax jurisdictions. This would enable SARS to dig deeper into companies’ affairs.  The World Bank and International Monetary Fund (IMF) had used their econometric models to run data for the committee to determine the average effective tax rate, as well as the marginal effective tax of South African companies. They found that the lowest marginal effective tax rate was in the tourism sector (because of depreciation allowances) and not mining, which was close to the corporate tax rate of 28%.

Deloitte said transfer pricing rules themselves were probably neutral in terms of promoting industrialisation, because their purpose was simply to achieve arm’s length profits across the value chain. They were therefore designed to achieve arm’s length profits regardless of whether an economy was highly industrialised or not, because it followed the inherent attributes of the economy. However, transfer pricing rules based on international best practice provided investors with certainty and it also protected the tax base of the relevant country. Transfer pricing rules in terms of the impact on the transformation of an economy were neutral as well and did not promote any specific policy. However, protection of tax base and promotion of investor certainty was equally vital in this context. South Africa was one of the first countries in Africa to adopt specific transfer pricing rules and had recruited and developed a dedicated transfer pricing audit team at SARS to audit potential transfer mispricing. The result was revenue generation of approximately R5 billion over the last three years from 30 audits and adjustments totaling R20 billion. SARS had recognised the need for greater certainty in transfer pricing and also noted that transfer pricing was not a major concern in the mining industry.

Prof Johann Hattingh said there was more than enough in the legislative armoury to effectively combat intercompany mispricing or tax abusive behaviour, but SARS was understaffed and outnumbered to effectively implement the transfer pricing legislation on a broad spectrum. Transfer pricing was reciprocal because a price adjustment in one country should be reflected in the other country otherwise economic double taxation occurred and unilateral deviation would upset partners. Hence there was a high degree of international uniformity in the OECD and UN guidelines.  The OECD and G20 currently focused on addressing tax planning strategies used by multinationals such as the Base Erosion and Profit Shifting (BEPS) project. The focus was on industries that relied on intangible assets to create value. Further sophistication and complexity in transfer pricing guidelines would follow and the Davis Tax Committee recommended the adoption of G20/OECD BEPS work to date. There was nothing particularly special about applying transfer pricing legislation and guidelines to mining of minerals or gas. It was not easy to manipulate intercompany price of heavily traded commodities. Pricing of intercompany services were generic to all industries and mispricing of services was not particular to mining.

The Committee debated whether transfer pricing was neutral and wanted clarification on the legality of transfer pricing. Members focused on the consensus in the presentations that SARS lacked the resources and the capacity to effectively address the situation and wanted to know what specific resources were needed. The Committee asked if the tax authority was sufficiently capacitated, whether this issue would be properly addressed. Members noted that the implementation of the OECD guidelines was a global challenge, but also noted that South Africa had unique challenges that might not have been considered when those guidelines were drafted.

The National Union of Mineworkers explained that the transfer price should in principle match either what the seller would charge an independent, arm’s length customer, or what the buyer would pay an independent, arm’s length supplier. Transfer pricing had no meaningful Employee Stock Ownership Plans (ESOP) for employees and meant retrenchment to employees. It resulted in low and unequal salaries, inadequate investment on skills development, poor implementation of Social and Labour Plans (SLPs) and community projects and it led to less investment on health and safety standards, resulting in injuries and fatalities. A reduction in profits led to bloated overheads and a reduction in labour costs meant retrenchments. It was ironic that management still got above inflation increases. The Portfolio Committee needed to convene an urgent meeting with the Departments of Mineral Resources, Energy, Economic Development, Agriculture, Forestry and Fisheries and Finance. All transformation sector charter councils should be vigorous in monitoring transfer (mis)pricing. SARS needed to be mandated to invest more resources in monitoring and detection of these illicit transactions. The Financial Intelligence Centre (FIC) should investigate the role of financial institutions in promoting these illicit transactions and tax evasions or avoidance. The Black Economic Empowerment (BEE) Commission needed to be urgently established and should investigate all non meaningful empowerment transactions.

The South African Mining Development Association highlighted how transfer pricing in different sectors directly translated to the challenges South Africa currently faced in terms of electricity, e-tools xenophobic attacks. The detrimental impact on Broad-Based Black Economic Empowerment (B-BBEE) ownership, beneficiation, procurement and all the other elements of the Mining Charter should be investigated. The alignment of the Mining Charter with DTI’s B-BBEE Codes of Good Practice had not been made despite the fact that the Mining Charter had a 2014 deadline to comply with. SAMDA suggested that the immediate alignment of the Mining Charter with DTI’s B-BBEE Codes of Good Practice should be done as it was long overdue to address transfer pricing and Charter non-compliance. Section 26(3) of the MPRDA stated that any person who intended to beneficiate any mineral mined in the Republic outside the Republic may only do so after written notice and in consultation with the Minister. Section 26(3) of the MPRDA could be used to assist government in determining the true value of the commodities being transferred to the end user or consumer. Companies that have been in breach of the 2014 Mining Charter deadline should be penalised under the relevant clauses of the MPRDA. The Department of Mineral Resources (DMR) should be accountable to the proper implementation of the MPRDA and compliance to the Mining Charter.

The Committee discussed the opposing views SAMDA and NUM held on the prevalence and impact of transfer pricing in the mining sector. NUM was cautioned about the threat of strike action, because of the historically devastating effects such actions could have. It was important for a progressive union to fully engage and negotiate with mining companies for the benefit of mine workers. Members discussed the responsibility of the Department of Mineral Resources to implement the MPRDA, because it encouraged equity ownership and beneficiation.

Meeting report

Judge Dennis Davis on Transfer Pricing

Judge Davis, Chairperson, Tax Review Committee, said the main focus was base erosion and profit shifting (BEPS) and the committee did not have precise amounts on the money lost through transfer pricing. About three years ago, the South African Revenue Services (SARS) did a very aggressive investigation into transfer pricing and collected R1.1 billion for just that one financial year. This indicated that there was a considerable “haemorrhaging of money”.  It was not only companies that were involved in taking money illegally out of the country and individuals had also siphoned off money abroad. Recent disclosures through the British bank HSBC had revealed this money siphoning and about R23 billion of that money was South African money and this was being investigated by SARS. It appeared that Lonmin, learned through disclosures during the Marikana inquiry, had saved about R280 million in taxes through a Bermuda company.

When multinational companies operated in different countries where they were subjected to different laws, they might resort to fictitious transfer pricing, whereby profits were manipulated to appear lower in countries with higher tax rates and higher in countries with lower tax rates. The Organisation for Economic Co-operation and Development (OECD), which had been equally concerned about this and to which South Africa had made major contributions in terms of the BEPS initiatives, identified transfers of intangibles for less than full value, over capitalisation of tax group companies and contractual allocations to low risk tax environments.

SARS lacked the capacity to deal effectively with transfer pricing. SARS was also not provided with sufficient information by taxpayers to allow it to probe cross-border transactions to determine whether it involved the illicit transfer of profits from high-tax to low-tax regimes. The abuse of transfer pricing was of concern to governments worldwide. It enabled multinational corporations to pay little tax in the countries in which they operated. Multinational corporations under close scrutiny by tax authorities globally might not be the main culprits, but rather second tier companies involved in cross-border trading. The Davis Tax Committee had recommended to National Treasury that the special unit in SARS dedicated to base erosion and profit shifting be strengthened. The unit had about 20 people, including clerical staff, whereas the equivalent unit in the United Kingdom (UK) had about 200 staff. In its report, the committee had proposed that all companies should have to state whether they had firms in tax havens or low tax jurisdictions. This would enable SARS to dig deeper into companies’ affairs.

 The World Bank and International Monetary Fund (IMF) had used their econometric models to run data for the committee to determine the average effective tax rate, as well as the marginal effective tax of South African companies. They found that the lowest marginal effective tax rate was in the tourism sector (because of depreciation allowances) and not mining, which was close to the corporate tax rate of 28%.

The Chairperson expressed the Committee’s appreciation for the presentation.

Deloitte on Transfer Pricing in South Africa

Mr Billy Joubert, Tax Director, Deloitte, said transfer pricing rules were anti-avoidance rules and were designed to ensure taxpayers did not manipulate prices within multi-national groups, thereby shifting profits to lower tax jurisdictions. This behavior potentially had the effect of eroding the tax base of the countries with higher tax rates and transfer pricing was similarly done around the world. Transfer pricing rules themselves were probably neutral in terms of promoting industrialisation, because their purpose was simply to achieve arm’s length profits across the value chain. They are therefore designed to achieve arm’s length profits regardless of whether an economy was highly industrialised or not. It followed the inherent attributes of the economy. However, transfer pricing rules based on international best practice provided investors with certainty and it also protected the tax base of the relevant country. It was therefore an essential part of any tax system except for very low tax jurisdictions. Transfer pricing rules in terms of the impact on the transformation of an economy were neutral as well and did not promote any specific policy. However, protection of tax base and promotion of investor certainty was equally vital in this context.

Mr Joubert said South Africa widely adopted the Model Tax Convention (MTC) in the treaties it signed to avoid the incidence of double tax. The Transfer Pricing Guidelines was a consensus document of the Centre for Tax Policy at the OECD of which South Africa was an observer and an active contributor. This was critical to align with the tax policies adopted by most of South Africa’s trading partners and it ensured jurisdiction was able to tax its fair share of the profit. The United Nations (UN) Practical Manual on Transfer Pricing also endorsed the arm’s length principle and South Africa had adopted this standard in its domestic transfer pricing rules and endorsed this as the global standard.

South African transfer pricing rules originated in 1995 and provided a discretion to the Commissioner to adjust consideration paid or received if transactions were not arm’s length. South Africa was one of the first countries in Africa to adopt specific transfer pricing rules and had recruited and developed a dedicated transfer pricing audit team at SARS to audit potential transfer mispricing. The result was revenue generation of approximately R5 billion over the last three years from 30 audits and adjustments totaling R20 billion. The new legislation affective from 2012 more closely aligned the global standard as endorsed by Article 9 of the MTC to extend the legislative reach and it changed the transfer pricing rules to a self-assessment provision. The new rules were more closely aligned to the global standard and were ahead of many other countries.

Weaknesses and areas for development included SARS’ resource capacity to implement the audit plan and there was a strong reliance on use of alternate dispute resolution to resolve transfer pricing as opposed to litigation which provided for greater certainty. There was alack of certainty in terms of outdated practice notes and limited guidance on implementation of new secondary adjustment mechanism and interaction with the Double Tax Agreements. SARS had recognised the need for greater certainty in transfer pricing and also noted that transfer pricing was not a major concern in the mining industry.

Johann Hattingh on Transfer Pricing

Prof Johann Hattingh, Associate Professor, University of Cape Town: Department of Commercial Law and Centre for Tax Research, said Section 31 of the Income Tax Act, introduced in 1997 following a recommendation by the Katz Commission, required related parties to transact at arm’s length for South African tax purposes. This was supplemented by the adoption of the OECD guidelines and the UN Practical Manual on Transfer Pricing for Developing Countries. In addition, SARS could address pure tax avoidance through the General Anti-Avoidance Rule (Section 80) or abuse through the common law ‘sham’ doctrine. In essence, SARS was enabled to apply modern and internationally harmonised transfer pricing guidelines developed under the aegis of the OECD and the UN and taxpayers were legally obliged to comply since 1997.SARS had power to require full information to audit and detect intercompany transactions, though not always compulsory for taxpayers. The Davis Tax Committee recommended full compulsory OECD style taxpayer information disclosure. There was more than enough in the legislative armoury to effectively combat intercompany mispricing or tax abusive behaviour, but SARS was understaffed and outnumbered to effectively implement the transfer pricing legislation on a broad spectrum. It will become severe when international taxpayer information exchange went online.

Transfer pricing was reciprocal because a price adjustment in one country should be reflected in the other country otherwise economic double taxation occurred and unilateral deviation would upset partners. Hence there was a high degree of international uniformity in the OECD and UN guidelines. All the BRICS countries except Brazil took the OECD as a starting point. Brazil followed its own transfer pricing approach to establish arm’s length prices by using fixed commodity prices derived international sources. It created certainty in the tax treatment and created an uneven playing field and thus competitive advantage for the Brazilian economy, but it could also result in unresolved economic double taxation of corporate profits.

The OECD and G20 currently focused on addressing tax planning strategies used by multinationals such as the Base Erosion and Profit Shifting (BEPS) project. The focus was on industries that relied on intangible assets to create value. Further sophistication and complexity in transfer pricing guidelines would follow and the Davis Tax Committee recommended the adoption of G20/OECD BEPS work to date. There was nothing particularly special about applying transfer pricing legislation and guidelines to mining of minerals or gas. It was not easy to manipulate intercompany price of heavily traded commodities. Pricing of intercompany services were generic to all industries and mispricing of services was not particular to mining. Emphasis should be on transparency and ensuring SARS had capacity to process taxpayer information and audit tax compliance. Competitiveness of the South African tax system was an issue because transfer pricing planning strategies both benefited and presented a risk to the South African tax base.  Tax attributes encouraged shifting of business activities and associated profits into South Africa, but the risk to the tax base was aggressive structures involving shifting profit with no associated substance to low or no tax jurisdictions.

Discussion

Mr F Shivambu (EFF) said the African Monitor, a non-governmental organisation (NGO) that focused on these issues, said South Africa lost R237 billion in illicit financial flows in 2011 and it had also been reported that one multinational company avoided tax to the excess of R2 billion. The arm’s length principle showed that multinational corporations were expected to benchmark how to trade with an unrelated partner or subsidiary. Effective implementation of the OECD guidelines was a global challenge and politicians were not united on the legality or illegality of transfer pricing. In terms of SARS, it was not only a question of resources, but there should be clarity on what should be done.

Judge Davis replied that there were certain clear criminal elements such as the non-declaration of assets and the illegal siphoning of money out of the country for which people should be legally pursued. The problem with transfer pricing was that profits were declared, but the validity of those declarations needed to be investigated. Arm’s length transactions could not be properly investigated due to the lack of information and SARS needed more exerts in that space. The Davis Tax Committee tested all the figures and the empirical data did not always stand up to the amount of money lost through transfer pricing as reported by some.  

Mr Joubert replied that SARS had considerable power, but the onus of proof rested on the taxpayer.

Mr A Williams (ANC) asked how the companies that practiced transfer pricing in South Africa compared to the best practices in other countries in terms of the rights of workers. He asked Prof Hattingh what he meant by “legitimate transfer pricing” and why he used 20% as an example of company tax rates. He wanted to know why transfer pricing should not be banned completely, because in spite of the country’s substantial poor population, it seemed that big businesses or multinational corporations were making massive profits and not contributing to the country’s agenda to address poverty, inequality and unemployment and transformation.

Judge Davis replied that there were legitimate groups of companies doing legitimate transactions that could not be banned. The problem occurred when profits were manipulated by virtue of transactions where the prices were manipulated which led to the erosion of the tax base of a country. 

Prof Hattingh replied that the tax rate of UK was 20% and the point was that it included competition between developed countries and developing countries like South Africa, but of course there were tax havens where mispricing and price manipulations occurred more regularly. 

Mr B Mkongi (ANC) asked what legislative amendments or government structures could be applied to address this issue and asked what specific resources was needed by SARS to effectively address the problems. The proposals for openness and transparency had no substance, because people were able to manipulate the guidelines.

Mr D Macpherson (DA) said the illicit form of transfer pricing was not good for South Africa and he asked why SARS had not implemented the recommendations by the Davis Tax Committee. This issue was hugely complex and the Committee might not be fully capacitated to understand the issue of illicit transfer pricing. This was not a political matter, but rather a national concern that needed national input. Members could not just slam companies that did not pay tax when some Honourable Members themselves did not pay tax.

The Chairperson asked Mr Macpherson to raise substantive issues.

Mr Macpherson said R6 billion was lost in corruption and Parliament and the country should take a stand against all illicit activities that deliberately robbed the government of revenue. There should be a fair and competitive tax regime.

Judge Davis replied that the recommendations were made to the Minister and to SARS and it was a continuous engagement.

Mr Shivambu said the DA wanted to trivialise this issue and should not presume that Members of the Committee could not make informed input on this subject.

The Chairperson of the Portfolio Committee on Mineral Resources, Mr S Luzipho (ANC) said it seemed that the presentation somewhat sought to justify transfer pricing and any decision to be taken should be done in consideration of all the input from the relevant committees in a consolidated approach. The experiences of most developed countries were not the same, because the starting point for South Africa was economic redress and even with common standards at a global level, historical injustices against people, especially in the mining industry, had to be addressed. Legislation was needed to protect against corruption and where people found ways to circumvent the law, that legislation needed to be tightened.

Judge Davis agreed and said additional revenue was needed to redress historical injustices and the World Bank report and other South African economists agreed that although inequality was still a big challenge, South Africa had addressed this challenge better than most countries, including Brazil. There was no evidence that transfer pricing affected the mining industry notably. The Minister of Finance said that R17 billion in taxes needed to be raised in the medium term and if at least R7 billion could be raised by the curbing of illicit transfer pricing, taxes would not have to be raised by 1%.

Mr M Kalako (ANC) said he did not agree with the assertion that transfer pricing was neutral, because it was counterproductive to the progress of the country. He asked if transfer pricing would be addressed if SARS was sufficiently capacitated and he asked for an opinion on whether tax avoidance should be made illegal.

Mr Joubert said that transfer pricing occurred when a company transacted with a related cross-border company and it would not be meaningful to say that such a transaction should be criminalised. The neutrality of transfer pricing simply meant that cross-border transactions, which was essentially transfer pricing should be assessed for its validity. It was neutral until it was assessed and found to be illicit or not.

Ms P Mantashe (ANC) said transfer pricing was a sophisticated tool for looting the resources of the country and she asked how that could possibly be legal.

Mr Joubert disagreed and said once manipulation of profits took place; the sophistication of the manipulation became tools that looted the resources of the country.

The Chairperson said the presentations highlighted a variety of ways that transfer pricing was labeled and she asked for clarification. She also disagreed with the assertion that transfer pricing was essentially neutral. She highlighted to Members that these presentations talked to the impact of pricing on the Industrial Policy Action Plan (IPAP), value addition and beneficiation.

Judge Davis said this matter focused entirely on related entities having transactions where the profits were manipulated.

The Chairperson said that the remaining questions by Members would be sent to the presenters to be answered in writing. Members were not elected based on their expertise on a particular subject and that was why the Committee relied on such engagements with experts to make both informed decisions and inform possible legislative amendments. Even then, Members might not agree on everything, but it was important to listen to all the input. Radical transformation needed to happen in a responsible manner. She appealed to Members to show respect for each other’s dignity, because Members did not necessarily needed to agree on issues, but needed to stick to substantive issues.

The Committee broke for tea and presentations by the South African Mining Development Association (SAMDA) and the National Union of Mineworkers (NUM) would follow.

National Union of Mineworkers (NUM) on Transfer Pricing

Mr Luthando Brukwe, Head of Transformation, NUM, explained that the transfer price should in principle match either what the seller would charge an independent, arm’s length customer, or what the buyer would pay an independent, arm’s length supplier.

Transfer pricing defeated the objectives of the Minerals and Petroleum Resources Development Act of 2002, which stated:

-Promote equitable access to the nation’s minerals to all people of South Africa;

-Substantially and meaningfully expand opportunities for historically disadvantaged persons, including women, to enter the mineral and petroleum industries and to benefit from the exploitation of the nation’s mineral and petroleum resources;

-Promote economic growth, mineral and petroleum resources development in the Republic; and lastly

-Promote employment and advance the social and economic welfare for all South Africans amongst others.

Transfer pricing had no meaningful Employee Stock Ownership Plans (ESOP) for employees and meant retrenchment to employees. It resulted in low and unequal salaries, inadequate investment on skills development, poor implementation of Social and Labour Plans (SLPs) and community projects and it led to less investment on health and safety standards, resulting in injuries and fatalities. A reduction in profits led to bloated overheads and a reduction in labour costs meant retrenchments, but it was ironic that management still got above inflation increases. The Portfolio Committee needed to convene an urgent meeting with the Departments of Mineral Resources, Energy, Economic Development, Agriculture, Forestry and Fisheries and Finance. All transformation sector charter councils should be vigorous in monitoring transfer (mis)pricing. SARS needed to be mandated to invest more resources in monitoring and detection of these illicit transactions. The Financial Intelligence Centre (FIC) should investigate the role of financial institutions in promoting these illicit transactions and tax evasions or avoidance. The Black Economic Empowerment (BEE) Commission needed to be urgently established and should investigate all non meaningful empowerment transactions.

South African Mining Development Association (SAMDA) on Transfer Pricing

Ms Bridgette Radebe, President, SAMDA, said as transfer pricing regulating was tightened in South Africa, more sophisticated forms were developed. Out of 151 countries, South Africa lost, on average, the 12th highest amount of money through illicit financial outflows. She disagreed with the statement by previous presenters on the ‘neutrality’ of transfer pricing and the effects on the mining sector. The mining sector had direct and indirect contribution to the whole economy as demonstrated by a few of the many sectors of the economy below:

-17% of GDP (direct and indirect);

-38% of merchandise exports (primary and beneficiated mineral exports)

-19% of private sector investment

-11.9% of total investment in the economy

-50% of volume of Transnet’s rail and ports

-16% of formal sector employment (direct and indirect)

-94% of electricity generation via coal power plants

-40% of electricity demand

-37% of country’s liquid fuels via coal

-Accounts for R78 billion spent in wages and salaries

Ms Radebe cautioned however, that the above figures of the direct and indirect mining contribution to the South African economy were artificial and misleading because the genuine figures had been eroded through transfer pricing. She highlighted how these figures directly translated to the challenges South Africa currently faced in terms of electricity, e-tools xenophobic attacks. The whole economy was therefore denied the opportunity of sustainable growth, rapid economic transformation was sabotaged, the National Development Plan was being eroded and subsequently disgruntled workers embarked on labour unrest. Within 21 years of our democracy it was only the government that had thus far made meaningful contributed towards addressing the social and economic inequalities.

Effective ownership was a requisite instrument to effect meaningful integration of historically disadvantaged South Africans into the mainstream economy. In order to achieve a substantial change in radical and gender disparities prevalent in ownership of mining assets, stakeholders committed to achieving a minimum target of 26% ownership to enable meaningful economic participation by 2014.

Ms Radebe highlighted the different scorecards, according to the Mineral and Petroleum Resources Development Act (MPRDA) against which companies have to be found compliant to be licensed. Local procurement was attributable to competitiveness and transformation, captured economic value, presented opportunities to extend economic growth that allowed for the creation of decent jobs and widened scope for market access of South African Capital Goods and Services. In order to achieve this, the mining industry should procure a minimum of 40% of capital goods from BEE entities by 2014, ensure that multinational suppliers of capital goods annually contributed to a minimum of 0.5% of annual income generated from local mining companies towards socio-economic development of local communities into a social development fund from 2010; and to procure 70% of services and 50% of consumer goods from BEE entities by 2014. Beneficiation sought to translate comparative advantage in mineral resources endowment into competitive advantage as fulcrum to enhance industrialisation in line with state development priorities. In this regard, mining companies should facilitate local beneficiation of mineral commodities by adhering to the provision of Section 26 of the MPRDA and the Mineral Beneficiation Strategy. She provided the Committee with a practical case study that showed how transfer pricing in the mining industry took place.

SAMDA welcomed the role of local and foreign marketing agents and their impact on the mining sector should be researched, better understood through the due diligence process on transfer pricing. The role and benefits of companies with primary listing off-shores should be researched and reviewed. The detrimental impact on Broad-Based Black Economic Empowerment (B-BBEE) ownership, beneficiation, procurement and all the other elements of the Mining Charter should be investigated. The alignment of the Mining Charter with DTI’s B-BBEE Codes of Good Practice had not been made despite the fact that the Mining Charter had a 2014 deadline to comply with. SAMDA suggested that the immediate alignment of the Mining Charter with DTI’s B-BBEE Codes of Good Practice should be done as it was long overdue to address transfer pricing and Charter non-compliance. Section 26(3) of the MPRDA stated that any person who intended to beneficiate any mineral mined in the Republic outside the Republic may only do so after written notice and in consultation with the Minister. Section 26(3) of the MPRDA could be used to assist government in determining the true value of the commodities being transferred to the end user or consumer. Companies that have been in breach of the 2014 Mining Charter deadline should be penalised under the relevant clauses of the MPRDA.

Discussion

Mr Mkongi asked what the position of SAMDA and NUM was on the statements from previous presenters that transfer pricing did not really affect the mining industry. He asked NUM what their responsibility was in ensuring that investment and research, development and exploration took place to promote local manufacturing and beneficiation. He also wanted to know how SAMDA felt about the position the recent G20 took on transfer pricing. He asked what in the current legislation could be amended to deal with depreciation.

Mr Peter Temane, Chairperson, SAMDA, said he understood that different sectors and academics would have different views on transfer pricing, but it was often the South African BEE partner being negatively impacted through ownership equity. The Act was clear about the penalties and consequences of non-compliance, but DMR was not invoking the MPRDA.  SAMDA’s position was that “first world solutions” should not be imposed on developing countries.

Mr Brukwe replied that there was definitely transfer pricing in the mining industry and there had been about 30 investigations done amounting to approximately R2.5 billion. NUM was currently fighting about 15 companies wanting to retrench between 5 000 to 10 000 employees. There had been no independent evaluations done and Num’s position was that if the mines could no longer be mined, the licenses should be given back to the regulators to find competent companies to keep running these mines. Mining companies should be representative of the demographics of South Africa. The Act was not being thoroughly implemented because it also spoke to the business process and the alternatives to retrenchments. These alternatives included reducing the bonuses paid to management which was not regulated according to commodity prices. Compliance should not be “begged” for and talks and negotiations were not going anywhere. Transformation should not be negotiated, but rather demanded because this “country would burn” due to the unwillingness of mining companies to engage. NUM would be attending a legislative framework discussion with stakeholders, but there had really been no movement and the problems in the mining industry were being addressed in a reactionary manner. NUM believed there was hope in achieving the objectives of the Constitution and the B-BBEE Act.

Ms Mantashe said the Constitution of South Africa allowed workers to embark on strike action, but it was not the responsibility if the Committee to allow NUM to burn the country.  A progressive union should not threaten that if there was nothing done, they would “burn the country”. 

A DMR official stated that all the points raised here would be reported to DMR for consideration. DMR would look at the penalties that should be invoked in the areas of non-compliance because there had been much success in mine health and safety where these penalties were quite steep compared to other penalties. Section 99 of the MPRDA had been strengthened that talked to the smaller mine ownership. DMR and SARS had been working together which would be shared once the memorandum of understanding was in place. This partnership with SARS would assist with the information needed for SARS to address transfer pricing challenges. A stakeholders’ forum was needed to deal with transfer pricing in the mining industry. NUM’s recommendations were noted and the forums would have BEE representation as well as community representation. In terms of compliance, there had been efforts to streamline processes.

Mr Temane said an audit was done at some time by DMR and the Committee should ask where that audit report was as it would reveal who owned what. It was in SAMDA’s view that the bulk of South Africa’s mineral resources were in the hands of foreign nationals. It was a good thing that SAMDA and organised labour, together with communities, would come together and address this in terms of the South Africa’s economy.

Ms Radebe said entering into BEE partnerships were done in good faith but multinational companies often had other objectives, manipulating prices to such an extent that there was “no income” for beneficiation. This often led to companies never being able to do loan repayments and it also meant that the shares were not paid for. DMR had been approached on the concern that licenses were being issued to companies that were not Charter compliant. Implementation of the MPRDA and adhering to the Charter guidelines were essential and should be adhered to by DMR officials. Certain officials were not acting responsibly in this regard and it should be noted by Members of Parliament.

Mr Macpherson did not agree that e-tolls and load shedding was as a result of transfer pricing, because the electricity problems was a direct result of this government ignoring its own White Paper of 1998 to build more generators. Beneficiation was just one component of the things that should happen to ensure job creation. Transfer pricing should not be used as a reason to cover up for the mismanagement of state entities. There were so many contentious positions on transfer pricing and the Committee needed to be careful on its own position on transfer pricing.

Ms Radebe said many coal mines had enough and suitable coal to supply to Eskom, but there was no legislation in place that regulate the supply. Producers of coal would rather export the coal, selling it to sister companies at cheap rates and those companies sold coal at inflated cross-border rates. If the supply of coal to Eskom was properly regulated it might address some of the challenges and relief some of the pressure the country’s electricity supply was under. The economy should be holistically assessed in determining the impact of transfer pricing.

The Chairperson excused herself and Mr Kalako took over as Acting Chairperson.

Mr Shivambu said there were laws put in place post 1994, but mining corporations were not being held accountable and an impression was created that all these issues would be resolved by 2014 but 2014 had passed. There were essentially no laws for multinational corporations who did as they wished and it contributed to poverty and inequality in South Africa. There needed to state driven capacity to enforce the laws.

Mr Temane said it was important that Members engaged with DMR on the proper implementation of the MPRDA and adherence to the Charter guidelines.

Mr Kalako thanked those who participated in the public hearing. Transfer pricing was a much broader issue, it impacted on many other issues especially with regards to legislation. As the Committee had heard, there was a question of capacity in SARS and this was one of the areas that needed to be strengthened. However, the most worrying problem was that of compliance. Since 1995 Parliament had worked very hard to change legislation to address these problems, and then in 2015 Parliament still found that officials were not implementing the legislation. In 2015, nothing in the Charter had been achieved said a lot about the officials and these dialogues with industry and stakeholders were important. There was legislation in place, but it was clear that it had not been implemented. This problem would persist if government did not look into these issues with departments and officials. No one in the Committee meeting could explain how a company that had not complied with legislation, had their license renewed. The Department of Finance should be asked to present their recommendations on transfer pricing so that the Committee could engage at that level. This was not a one department issue, there needed to be coordination of all departments involved in order to ensure economic transformation in South Africa.

The engagements were robust and the Committee would sit and have its own deliberations. Simply amending Acts and passing new legislation did not help when there was not implementation. Unions, industry and stakeholders should be encouraged to assist government in implementing transformation in the economy of the country. Economic transformation was the currently battle, though the government had done a lot to transform South Africa – this was still not reflected on the streets. Majority of South Africans were still poor, and the question was who controlled the economy and how resources were distributed. Money could not leave the shores of South Africa without benefiting South Africans.

Mr Kalako thanked everyone for their input and the meeting was adjourned. 

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