Transfer Pricing Public Hearings: Submissions from Department of Trade and Industry, Alternative Information Development Centre, SA Mining Development Centre, Mr F Shivambu and Prof B Turok briefings

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Trade and Industry

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

The Committee continued with public hearings on transfer pricing, taking presentations from a number of institutions and individuals.

Mr F Shivambu, Prof. B Turok and representatives from the Department of Trade and Industry (DTI), the ; the South African Mining Development Association (SAMDA) gave inputs on Transfer Pricing to the Portfolio Committee on Trade and Industry.

The Alternative Information Development Centre (AIDC) noted four main findings which emerged from its research. The consequences of unacceptable transfer pricing, illicit outflows and aggressive tax planning were much deeper than merely eroding the tax base. Transfer pricing reduced the monetary base for living wages and local investment. Transfer pricing was not only an international and cross-border concern but had started within South Africa between local firms and subsidiaries of Multinational Enterprises (MNEs) before funds flowed across borders. Government entities that monitor and investigate corporate transparency and transfer pricing were under-resourced. The AIDC had three key recommendations. There was a need for a decisive shift to transparency where public pressure, critical research and investigative journalism could expose these practices. Financial Statements of Multi National Enterprises and their SA-based subsidiaries must be readily available to the public. Foreign companies that received regular income from SA should file financial statements with the Companies and Intellectual Property Commission, and there should be increased resources for monitoring. The South African Revenue Services (SARS) required additional resources to evaluate, interrogate and clamp down on transfer pricing. Some examples of transactions directly affecting subsidiaries in South Africa were cited.

The Department of Trade and Industry (dti) defined transfer pricing as a process by which related entities set prices at which they transfer goods or services between each other. When multinational companies operated in different countries, where they were subject to different laws, they might resort to fictitious transfer pricing in order to manipulate profits so that they appeared lower in a country with higher tax rates, and higher in a country with lower tax rate. Elements that constitute transfer pricing included mis-invoicing; capital flight / illicit financial flow; tax evasion; base erosion and profit shifting. Statistics were quoted suggesting that South Africa was losing around R147 billion per year to the illegal movement of money out of the country twelfth highest in the word. This went beyond tax revenue losses for it also posed threats to economic development and poverty alleviation, effective redistribution policies, labour empowerment and welfare,; entrepreneurial development and investment, and resource optimisation. Dodging of tax was unethical, infectious and had to be stopped. Dti recommended that SARS should be looking at different approaches, benchmarking against different countries that had been successful in dealing with transfer pricing, ensure clear and precise legislation to address the transfer pricing challenge, and have well trained and dedicated people to deal with cross border transactions.
 

SA Mining Development Association (SAMDA) said that the term ‘transfer pricing’ was used to describe arrangements involving the transfer of goods or services, at an artificial (usually lower) price, in order to transfer income from one business to another across different tax jurisdictions. Ways of price transfer included under reporting of commodity prices, in favour of contract pricing or recommended pricing; non-reporting of full range of products sold; inflated expenditure used to reduce profits locally. Although audit firms should be paying close attention to this and reporting on it, it was suggested that they did not do so, an issue examined later in the discussion sessions. It was suggested that auditors should be ensuring that Board Members, (especially the Finance and Audit Committees) adhered fully to non Transfer Pricing Rules. SAMDA noted its appreciation that the President had referred the Minerals and Petroleum Resources Development Amendment Bill back to Parliament, for this would allow all stakeholders to comment in full on the provisions and develop appropriate actions to try to ensure that the Charter reached its objectives.

Prof Ben Turok, as Director of the Institute For African Alternatives (IFAA), noted the origins of transfer pricing, and touched on taxation issues, current research on corporations in the mineral value chains, and the problems in the interface between Government and corporations in the mineral value chains. Parliament had long battled with obtaining fair taxation from business, and it was previously accepted that tax evasion was illegal but tax avoidance was not. However, MPs repeatedly raised concerns about the consequent losses to the fiscus, and changes were then made to slow down the concealment exercises. IFAA had been looking holistically into the beneficiaries of industry in South Africa, looking at scales of total operations and concluded that large corporations were not performing at maximum potential, and therefore affecting the economy and society.

Mr Floyd Shivambu, EFF MP, stressed that transfer mis-pricing, and especially mis-invoicing, amounted to aggressive tax avoidance, and were therefore illegal, and he criticised multinational corporations for continuing to disregard the country's legislation and exploit massive weaknesses. He suggested that Parliament make a strong point and pass an Anti Tax-Avoidance Act as a first step. A political solution would be to set up a Transfer Pricing Commission to facilitate more robust engagement with civil society. SARS should start building adequate internal capacity to monitor the movement of quantity and quality of goods, and Financial Intelligence institutions must be given a clear mandate by Parliament to conduct an aggressive investigation into tax avoidance. From an economic perspective, he suggested that State control and ownership of strategic sectors must be part of the comprehensive solution, and this included the nationalisation of mines. The SA Reserve Bank must be mandated to combat the phenomenon of transfer pricing through many national and international surveillance mechanisms. The Voluntary Disclosure Programme of the South African Reserve Bank should be revisited and re-conceptualised. He noted that the OECD methods had failed, in part because its approach did not prioritise non-members. For this reason, he suggested that South Africa should rather look to anti tax-avoidance legislation in other developing countries. Finally, any legislation should contain stringent penalties.

Members agreed with the suggestion that a holistic approach was needed, and a few comments were made about how wage negotiators were not given access to all financial statements, and this was a point that should be emphasised in the Committee's Report. Members asked for clarity on the comments about and roles of the large accounting firms, who were bound to insist that they were practising within the law. Members asked if South Africa had the capacity to "go it alone" in insisting on more stringent requirements on transfer pricing, and whether this would be good for its economy. They commented that lack of coordination between departments did not help, and asked specifically for comment on likely useful sanctions, and whether in fact the problem was lack of appropriate sanctioning in the legislation, or institutions failing to use the remedies that were already available to them. Mr Shivambu noted his disagreement with the conclusions of SAMDA on the minerals Bill and believed that a solution might lie with section 26, which would mean that the Government might have capacity to know which minerals were being taken out of the country. He suggested that the State should be using its procurement muscle. Other Members pointed that the provisions and principles of the Industrial Policy Action Plan might be used, and that trade and customs legislation and solutions could also help. All agreed on the need to capacitate SARS and the departments. The Committee asked for clarity on the interface between the Ministers of Mineral Resources and Trade and Industry, and wanted clarification on the references to the Broad Based Black Economic Empowerment Act.

Meeting report

Transfer Pricing: Continuation of public hearings
Alternative Information Development Centre (AIDC) submission

Ms Thokozile Madonko, Co-Director, AIDC, said that there were four main findings which emerged from the research of the Centre. Firstly, the consequences of unacceptable transfer pricing, illicit outflows and aggressive tax planning went far deeper than merely eroding the tax base. Transfer pricing could also reduce the monetary base for living wages and local investment. Transfer pricing was not only an international and cross-border concern; it started within South Africa, between local firms and subsidiaries of Multinational Enterprises (MNEs), before funds flowed across borders. Government entities that monitored and investigated corporate transparency and transfer pricing were under-resourced. The long “tradition of acceptance” continued. She said that the “all or nothing” approach to clamping down on transfer pricing for fear of losing Foreign Direct Investment (FDI) must be questioned. It ignored the precarious nature of investment in the face of large capital outflows. The question to be asked related to the net inflow, if illicit outflows were taken into account?

Ms Tamara Paremoer, Economist, AIDC, said that these findings led to three key recommendations. There was a need for a decisive shift to transparency where public pressure, critical research and investigative journalism can expose these practices. Financial Statements of Multi-National Enterprises (MNEs) and their SA-based subsidiaries must be readily available to the public. Foreign companies that received regular income from SA must file financial statements with Companies and Intellectual Property Commission (CIPC). Increased resources for monitoring were required by both CIPC, to monitor corporate compliance with disclosure rules, and by the South African Revenue Services (SARS), which required additional resources to evaluate, interrogate and clamp down on transfer pricing. In regard to narrowing the ambit of accepted practice, research had shown that transfers were accepted as long as they seemed “low” and reasonable. That was not the correct test- instead, the substance of a transaction must be interrogated. The role of accounting firms must also be interrogated.

Mr Dick Forslund, Senior Economist, AIDC, said that the total case emphasised issues of substance, that were particularly applicable to local subsidiaries, where an exclusive supply agreement between junior company and MNE subsidiary were in place. He cited an instance where the mine must sell its entire off-take to the MNE. The country needed a secure supply of coal, but it was of concern that the MNE levied a 4% “marketing fee” on junior companies to facilitate this. International trading arms levied a further 7% “sales commission” to trade coal on international market. In addition, a local subsidiary owned railway sidings and received beneficial prices for access to rail and port. The benefit was not passed on, however, to the junior miner. The revenue of that junior miner was thus reduced by fees and by opportunistic pricing.

Mr Forslund gave another example. He said that Eastplats (Canada) had lent itself R2.9 billion from the Bahamas. The Barplats Investment Limited is the Eastplats operating subsidiary in South Africa, and Eastplats has a 74.99% interest in it. The BEE Company, Gubevu Consortium Holdings (Pty) Ltd has a 25.01% interest in Barplats. Eastplats has a 49.9% stake in Gubevu, giving it a beneficial interest of 87.5% in Barplats.

Department of Trade and Industry (dti) submission

Mr Nkosi Madula, Chief Director, Department of Trade and Industry, outlined the content of his presentation. He said that transfer pricing was defined as a process by which related entities set prices at which they transferred goods or services between each other. When multinational companies operated in different countries, where they were subject to different laws, they might resort to fictitious transfer pricing whereby they manipulated profits so that they appeared lower in a country with higher tax rates, and higher in a country with lower tax rates.

Mr Livhu Mukhithi, Director, dti, said that elements that constitute transfer pricing included mis-invoicing; capital flight / illicit financial flow; tax evasion; base erosion and profit shifting. Illicit financial flows were due to trade mis-invoicing, and included flows both out of and into the country. These would allow multiple forms of tax evasion for both buyers and sellers, and also deprived governments of tax revenue, both in Africa and in other countries. The ultimate destination and ownership of the missing funds retained by those involved in these transactions was unclear. Much of these funds could end up in tax havens in third countries (according to the Africa focus bulletin of 26 May 2014).

Mr Mukhithi outlined the historical background. A report in the Mail & Guardian, of 16 December 2014, indicated that South Africa had probably lost roughly R147 billion per year to the illegal movement of money out of the country. The report also indicated that, out of 151 countries, South Africa was losing the twelfth highest amount of money through illegal financial flows. On 29 January 2015 the Director of African Monitor indicated that the country had lost R237 billion in illicit financial flow in 2011, and over R1 trillion between 2002 and 2010. The Economic Development Conference held in 2011 in Addis Ababa called for the establishment of a High Level Panel to look into illicit financial flows from Africa, and to make practical recommendations in this regard.

Mr Mukhithi said that the consequences and damages caused by transfer pricing went far beyond tax revenue loss and that they posed a real threat to economic development and poverty alleviation, effective redistribution policies, labour empowerment and welfare, entrepreneurial development and investment; resource optimization. He also pointed out that "dodging" tax was unethical, infectious and must be stopped.

Mr Mukhithi outlined the possible remedies. In terms of the international practice in Singapore, Inland Revenue Authority (IRAS) tax officials may audit the prices of transactions between related parties to verify if they were reflective of the real market prices. There was a belief that such an audit could provide a useful lead to transfer pricing adjustments. To reduce the risk of audits and double taxation, taxpayers transacting with their related parties were expected to apply the internationally endorsed "arm’s length" principle so that the transfer between them should be an arm’s length price, as if they were unrelated parties negotiating in a normal market. Three steps to be followed when implementing arm’s length principles were:
- Conduct comparability analysis
- Identification of the most appropriate transfer pricing method
- Determination of the arms' and determine the arm’s length results.

Russia also introduced penalties for possible non-compliance. It had imposed a penalty of 20% of the amount of additional tax payable in 2014, and this was to be increased to 40% in 2017.

Mr Mukhithi outlined the dti's recommendations. The South African government needed to ensure that SARS would look carefully at the different approaches to dealing with the habit of transfer pricing. It would have to benchmark with different countries that had been successful in dealing with transfer pricing. It would be necessary for SARS to develop clear and precise legislation that could address the transfer pricing challenge. In addition, SARS would have to have well trained and dedicated people to deal with cross border transactions.

South African Mining Development Association (SAMDA) submission

Ms Brigitte Radebe, President, SAMDA, said that the term ‘transfer pricing’ was used to describe arrangements involving the transfer of goods or services, at an artificial price, (usually lower) in order to transfer income from one business to an associated business in a different tax jurisdiction which, again, was often lower. Some producer companies would sell the company’s commodities to its marketing divisions at lower than market related prices. This resulted in the exportation of profits to the tax haven off-shore accounts, and the declaration of low profits and the payment of low tax in the country where the commodity was being produced and exported - namely, a loss to South Africa. As transfer pricing regulations were being tightened in South Africa, more sophisticated forms were developed, such as abuse of Advanced Pricing Agreements.

Ms Radebe said that there were different ways to transfer price. These included:
- Under reporting of commodity prices, in favour of contract pricing or recommended pricing
- Non-reporting of the full range of products sold
- Inflated expenditure being used to reduce profits locally
- Thin-capitalisation
- Transfers between two South African based companies which were connected, but where the transfer was towards the company carrying an assessed loss, which was then used to reduce prices
- Exchange rate misreporting.

Ms Radebe said that the role of audit firms was to pay attention to transfer pricing before issuing clean audits. Audit companies should ensure that transfer pricing was not happening. Audit companies should ensure that Board Members (especially those serving on the Finance and Audit Committees) adhered to non Transfer Pricing Rules. Financial institutions and banks should not do financial transactions with organisations that were involved in Transfer Pricing. Commercial law firms should pay attention to transfer pricing when structuring deals and drafting contracts. Commercial law firms, when advising clients, should insist on structuring legal agreements that adhered to non Transfer Pricing rules.

Ms Radebe spoke specifically to the position in relation to the minerals industry. Section 100(2)(a) of the Minerals and Petroleum Resources Development Act (MPRDA) was intended to ensure the attainment of Government’s objectives of redressing historical, social and economic inequalities, as stated in the Constitution. The Minister, within six months from the date on which this Act came into effect, would have to develop a broad-based socio-economic Empowerment Charter that would set the framework, targets and timetable for effecting the entry of historically disadvantaged South Africans into the mining industry, and allow such South Africans to benefit from the exploitation of mining and mineral resources.

Ms Radebe said that SAMDA commended the President for not signing the MPRDA Amendment Bill and instead referring it back to allow all the mining stakeholders to further contribute to the creation of a bill that meaningfully addressed all stakeholders' interests and expectations. The recent proposed court case was unnecessary, because the fact that the Bill had not been signed would allow those stakeholders now to address the clauses of the Bill that were of particular concern. She outlined some of the legislative clauses of the MPRDA that the Minister could use as punitive measures against stakeholders that were in breach of the Legislation. They included the Minister’s power to suspend or cancel permits or rights, in terms of section n 90 of the MPRDA. The Minister may also cancel or suspend any reconnaissance permit, technical co-operation permit, exploration right or production right, in accordance with the procedure contemplated in section 47.

Institute for African Alternatives (IFAA)/ Prof Ben Turok submission

Professor Ben Turok, Director, IFAA, outlined the origins of transfer pricing, by pointing out that in the years after the Second World War, South East Asia began a rapid process of industrialisation. Foreign multinational corporations saw immense opportunities of building factories in these countries where labour was cheap and taxes were low. Substantial investment followed, and plants of various kinds were built.

In order to maximise profit the following model was adopted: Country A was the source of raw material and a facility was built to harness this. Country B served as the source of the components needed. Country C was the base of manufacturing a product. Country D had an assembly plant and packaged the product. The final product was exported around the world.

How each country was chosen would depend on where the appropriate labour was cheapest and where taxes were lowest. In some cases, the production chain included Africa and Latin America. The head offices of these multinational corporations were generally in the US or Europe. This was a laborious system but was also highly profitable. In the present system of sophisticated financial mechanisms, multinational corporations could locate a production facility in one country, but use complex marketing and financial systems to spread.
 

Prof Turok said that the South African Parliament, and in particular its Portfolio Committee on Finance, had long battled with obtaining fair taxation from business. Previously, it was accepted that tax evasion was illegal but tax avoidance was permitted. Numerous auditors, accountants and lawyers argued extensively that it was perfectly in order for a professional firm to advise a company on how best to present their accounts to minimise tax liability. Thus a person could make claims on travel, and incidentals, to reduce tax, or even manipulate the annual accounts, showing a loss by setting aside money for depreciation or capital expenditure, all done to minimise tax payments. However, MPs repeatedly raised concerns about the consequent losses to the fiscus, and changes were then made to slow down the concealment exercises. This issue of what may be claimed to reduce a tax obligation remained before this Parliament, and it would include the international dimension.

The Institute for African Alternatives (IFAA) had been engaged on policy research in the area of interface between mining and manufacturing for several years. Working with the Industrial Development Corporation (IDC) and the United Nations Economic Commission for Africa (UNECA), IFAA had held several conferences at the IDC involving industry, government and economists, and Parliament had published the findings in New Agenda and the SA Journal of Social and Economic Policy. In examining the question of who were the beneficiaries, the IFAA had sought clarity on the scale of operations within South Africa in relation to the total operations, rather than just transfer pricing. The conclusion from all this work was that these large corporations were not performing at maximum potential. What was even more important was that South Africa was not getting the fullest benefit from these industries which were functioning well below full capacity. This had serious consequences for the economy and society. Employment was below potential, technological advances were limited, and the markets were deprived.

Transfer Pricing on Trade and Industry: What is to be done?

Mr Floyd Shivambu (EFF) said that the purpose of his presentation was supplementary to the submission made to the Portfolio Committee of Trade and Industry, looking at the conceptual basis, consequences, government response and concrete recommendations on the problem of transfer pricing. He would focus on particular on making recommendations as to what should be done.

He noted that transfer mis-pricing, and especially mis-invoicing, was aggressive tax avoidance, and was therefore illegal. Multinational Corporations (MNCs) continued to disregard the country's legislation and exploit massive weaknesses, a point noted in Action Aid, 2015:2. Due to lack of adequate legislation, transfer pricing neutrality and its practices had been abused by MNCs as early as the 1970s to increase profit for shareholders at the expense of workers and developing countries’ economies. He suggested that Parliament must pass an Anti-Tax Avoidance Act, which would complement all other existing legislation, as a first step in dealing with transfer pricing.

Mr Shivambu also made some recommendations on political actions. He thought that Parliament must set up a Transfer Pricing Commission to facilitate more robust engagement on the subject, and invite international civil society organisations to contribute. South African Revenue Services must start building adequate internal capacity to monitor the movement of quantity and quality of goods. Financial Intelligence institutions must be given a clear mandate by Parliament to conduct an aggressive investigation into tax avoidance, to guide proper action required. The South African Reserve Bank must look into a different approach from trade liberalisation and loose exchange control, because that did work.

Mr Shivambu outlined his economic action recommendations. He suggested that State control and ownership of strategic sectors must be part of the comprehensive solution to deal with transfer pricing. For protection of the tax revenue base, it was of paramount importance that the State should nationalise mines, and create a State Owned Mining company. The South African Reserve Bank’s mandate should include combating the phenomenon of transfer pricing through many national and international surveillance mechanisms. The Voluntary Disclosure Programme of the South African Reserve Bank should be revisited and re-conceptualised, with an understanding that South Africa had suffered high volumes of illicit financial flows and transfer pricing.

Mr Shivambu said that with regard to the OECD’s position on transfer pricing, the OECD’s methods have been applied by many countries ranging from developed economies and developing economies through the OECD funded capacity building programme, yet they had failed and continued to fail dismally. In most instances, the OECD’s approach to international trade and transfer pricing did not prioritise non-members, mostly developing economies in Africa, and therefore to continue blindly implementing their recommended methods would not lead to any material solution for South Africa.

Mr Shivambu said that the sixth method was therefore a mechanism to deal with transfer pricing, which departed from the OECD methods which had been applied in many countries over decades and failed. Mandating use of this sixth method had been an effective way for governments to increase the tax assessed on companies exporting commodities in the the Latin American regions. He suggested that there was a need to study the anti-tax avoidance legislation of Argentina, Brazil, Bolivia and India. This could inform the finer details of the appropriate legislation that would prevent and combat transfer pricing and tax avoidance in South Africa.

Mr Shivambu concluded that currently most of the legislation that related to corporations and MNCs did not have strong penalties, and thus was often abused by these corporations. Legislation should include criminalising the directors and executives who engaged in tax avoidance; withdrawal of operating licences; expropriation of those companies without compensation; fines and financial penalties, using a formula that penalised tax evaders.

Discussion
Mr A Williams (ANC) agreed with Prof Turok that it was necessary to look at the issue of transfer pricing in a holistic manner, and the Committee should not get bogged down in the detail, although there was a danger of that happening. The issues that were raised by the AIDC around wages were very important. As a former shop steward, he knew that wages were determined by the amount of profit of the company. When it was then taken into account that transfer pricing had been reducing that amount for years and years, it seemed that workers in South Africa had been not getting as much as they should have got. The cumulative effect of that was important and he suggested that this needed to be emphasised in the Committee Report, because it seemed that companies were simply stealing money from wages of workers of South Africa.

Mr Williams asked for clarity with regard to AIDC’s comments on the role of big accounting firms, and how they should be interrogated. He was sure that these firms would respond that they were merely practising within the law.

Mr N Koornhof (ANC) thanked Prof Turok for his input because it was to the point and had set a clear way forward for the Committee. He asked what would happen if South Africa were to "go it alone" in addressing transfer pricing, against other mining economies, since transfer pricing was a global phenomenon. He wondered if such actions would harm South Africa’s economy or be good for the economy.

Mr G Hill-Lewis (DA) thanked all the presenters, and said he enjoyed the frankness, directness and practicality of their presentations, and largely agreed with all they had said. However, he wanted to underscore the point made about co-ordination of government departments, which was something the dti had complained about. It had suffered as one of the senior Government departments in the Economic Cluster, which happened across the board.

Mr Hill-Lewis asked for comment from any one of the presenters with regard to the suggestions of follow up action and what sanctions solutions should be given to government on the issue transfer pricing. Several presenters made the point that there were already existing things that the Government could use, or existing "teeth" in the legislation that government was just not using. He asked if the main problem was the nature of the remedies, or the fact that they entities such as SARS were not using them as they were intended. He asked for an evaluation of where exactly the problem might lie.

Mr Hill-Lewis asked whether the dti had really required the services of public interest lawyers who recovered monies that were fraudulently transferred out of South Africa.

Mr F Shivambu (EFF) said that it was the third time that SAMDA had noted its appreciation to the President for referring back the Mineral and Petroleum Resources Development Amendment Bill, and allowing further opportunity for engagement. However, he disputed that this was really so. The specific instruction from the President was that the Bill should be referred back because of the section 26 amendments, and the new component that stated that there must be developments in pricing so that they could beneficiate local industrialists. The President had enquired whether this might not be contrary to the Constitution and the General Agreement on Trade and Tariffs that was signed in 1995. The Portfolio Committee on Mineral Resources had a question on that, and had taken the view that there was nothing illegal, because those processes did not override the law. This was something that needed to be looked into in depth, to look at problematic areas, and consider what the Bill had been brought back for. It was, to his mind, exactly section 26 that could deal with the crisis now being faced, because it stated that every person who intended to beneficiate in minerals outside the Republic may do so, in consultation with the Minister. If Government had the capacity to know which minerals were being taken out of the country, then certain things might be done differently. At the moment there was no proper assessment of the extent to which minerals were taken out of the country by mining companies, although the law stated clearly that such things should not happen. This then obviously was something that needed to be looked into.

Mr Shivambu agreed with Prof. Turok that most multinational companies depended on the State in terms of procurement. The State should utilise that procurement muscle or capacity, to dictate and give direction on certain things that should be done correctly.

Mr B Mkongi (ANC) proposed a way forward on the matter of transfer pricing, and suggested that one proposal, following from presentations of the past week, was for the Committee to acknowledge the overarching objective of the industrial policy in South Africa, as articulated by the Fifth intervention of Industrial Policy Action Plan (IPAP) - namely to counteract any industrial decline through the industrialisation project in South Africa, including supporting the economic growth of the country and diversification of the manufacturing sector through beneficiation, value addition and broad based black economic empowerment. According to the Minister of Trade and Industry, significant progress had been registered in implementing a range of trade measures, including tariffs, standards and compulsory specifications.

Similarly, Government efforts to stem the tide of illegal imports and exports and customs fraud, which constituted a grave danger to domestic manufacturing and unfair advantage to competition, had steadily gathered momentum. However, the Portfolio Committee on Trade and Industry was of the view that transfer pricing, mis-pricing, mis-invoicing and all the other elements of illicit fraud were a great threat to the success of industrialisation, service delivery and beneficiation in South Africa. The Committee was of the view that the transfer pricing or mis-pricing negatively impacted on the country’s ability to support economic growth and development which limited their success of fighting poverty, unemployment and income inequality, and distorted investment, trade and national income for South Africa.

Mr Mkongi said that the proposal had already been made that the country should fight against the dire consequences of transfer pricing, and deal with the legislation that was aimed at reducing or completely illegalising transfer pricing in South Africa.

Mr M Kalako (ANC) said that he was more interested on what was raised by Prof Turok on conditional licenses. There seemed to be an agreement that despite what had been passed in Parliament as laws, there was not proper implementation, and that was where the problem lay. This also came back to the question that was raised by Prof Turok, on whether those remedies were within the laws or not, or whether they were not implemented, and that was the short-term investigation to be done in trying to deal with the problem.

Mr Kalako said that he wanted the Committee to get more assistance in dealing with the proposal by Prof Turok on institutional arrangements, and he asked that someone should look into that and report back to the Committee.

Mr Kalako noted that there was a problem in the country and it was not at the level of Parliament but rather at the level of Departments. He questioned how, if somebody had violated any part of an Act ,whether it was around environmental issues, or around meeting the regulations or commands in the legislation, would not be sanctioned. If the Committee was not concentrating on those Departments not enforcing the law properly, then this suggested that Parliament was failing in its oversight role. He agreed that there was a need to capacitate SARS and the Departments.

The Chairperson noted that on slide 16 of the SAMDA presentation, there was mention of the MPRDA and Minister of Mineral Resources, and that the Minister of Mineral Resources was acting on the advice of the board, after consultation with the Minister of Trade and Industry. Slide 17 set out the relevant information on the MPRDA that applied to the Minister of Mineral Resources. She questioned how the Department of Trade and Industry was involved. The Committee may need to insert something on that in the concluding remarks to its Report, since the MPRDA was not a piece of legislation overseen by this Committee. The SAMDA had noted what affected it on slides 16 and 17, but basically there was a need to persuade the Minister of Mineral Resources, in terms of slide 18, to suspend or cancel the punitive measures that were set out on slide 19.

The Chairperson asked Ms Radebe and Mr Tamane to explain to the Committee their remarks about the BBBEE, which was specifically referred as "a trumping clause". She noted that it was supposed to take precedence over anything else that would impede BBBEE.

The Chairperson said that the Committee would welcome anything in writing about institutional arrangements from Prof Turok, because it could become one of the recommendations as a Committee.

The Chairperson asked AIDC to explain who the other countries were that had dealt with transfer pricing.

The Chairperson asked that the presenters, in the interests of time, should not give too much detail in their oral responses but should include the detail in written answers also.

Mr Forslund answered the question relating to the audit firms colluding with multinational companies. He read out an advertisement from PricewaterhouseCoopers as follows:

“Transfer pricing has emerged in the global economy as one of the most important tax issues for multinational companies.

Transfer pricing is an important driver of shareholder value, providing an opportunity to optimise the value of a business by effective tax rate and foreign tax credit management.

Managing transfer pricing risk remains critical in an increasingly aggressive environment. The South African Revenue Service (SARS) has continued to focus on transfer pricing and is currently involved in several major audits that could lead to substantial adjustments.

Transfer pricing has already been flagged as one of the key focus areas of the recently-introduced Large Business Centre. Consequently, organisations need to understand their approach to transfer pricing risk and dealings with SARS.

The PricewaterhouseCoopers transfer pricing team will work with you to ensure your organisation’s international financial position is effectively managed, your fiscal risk is covered and you are in the best possible position to take advantage of the benefits of globalisation and international restructuring as value chains are remodelled to increasingly focus on customer satisfaction.

With unrivalled transfer pricing expertise in South Africa, our team also draws upon global networks to offer you access to specialist knowledge and leading edge tools and solutions relevant to your industry.

The PwC transfer pricing team will ensure your organisation’s international financial position is effectively managed, your fiscal risk is covered and you are in the best possible position to take advantage of the benefits of globalisation and international restructuring”.

Mr Forslund said that when it came to wage negotiations, there was a practise of never letting the financial statements of subsidiaries go over to the trade union negotiators because that would clear them. In the long platinum strikes that Members would remember, AIDC was involved in on the side of the union AMCU. It was very important for the employers not to disclose their financial statements, especially the subsidiaries that were actually employing the workers. Whenever wage agreements were made, they would be made with the subsidiaries. A wage negotiator was not allowed to see the financial statements. He suggested the need to break with that practice. Since South Africa seemed to be the world leader in litigation and confidentiality, he suggested that it was in an ideal situation to break with that practice. AIDC and other institutions needed help and for public pressure to be placed on those multinational companies.

Mr Forslund reminded Members also that in 2008 one of the largest auditing firms, Andersons, had "disappeared" on the ground, because it had been involved in illegal practices. There was a big problem with these auditing firms which did not see themselves as representatives of the public, but rather saw themselves as representing their clients, the multinational companies. The South African law was clear that an auditor was not only representing his/her client but should also represent the public and should see to it that everything was done in accordance with the law. However, as the PwC advertisement clearly showed, they were representing the corporations with regard to transfer pricing, and were not representing the public of South Africa. It should be stressed how this practice was depleting the subsidiaries which had an obligation in terms of the Mining Charter, and who were paying taxes and paying for the employment of the workers. These practices were a major source of mining instability in the country. That was why the AIDC supported the R12  500 wage demand. It believed that there was no reason to reject such a demand because mining companies were not putting the numbers on the table. This has to be changed. AIDC could pinpoint small adjustments in terms of authorities having difficulty in implementing the law because auditing firms were in collusion with multinational companies.

Mr Peter Temane, Chairman: SAMDA expanded on the link between the BBBEE Act and the MPRDA. For years, SAMDA had been coming to Parliament to ask for the alignment of the Charters. On 1 May 2015 the amendments of the Charter would be coming into effect. The "trumping" provisions of the BBBEE Act were due to the misalignment of the sector Codes and the dti had decided to champion that cause because nobody else wanted to align them. This would address not only the issue of ownership. In relation to BBBEE, ownership bids were higher than 26% in the MPRDA, which SAMDA supported. The BBBEE legislation had been leaked before promulgation, and that had suggested 51% BEE ownership, not 26%. SAMDA felt that because of the "trumping" effect, this would force everybody to lift up their sights, and not only leave it to the departments. He urged that it be enforced in law.

Prof Turok said that he welcomed the report from OECD, but it must be borne in mind that the OECD remained an organisation of wealthy countries who essentially defended the interests of the United States and Europe. Although there was a statement that the comments on transfer pricing were welcomed, they should not be overriding.

Prof Turok spoke to the issue of whether South Africa could "go it alone" and said that the Finance Committee had been discussing the issues with various countries, and in certain cases Government put down certain requirements in terms of who paid the tax, and in whose jurisdiction. These things were not cast in stone. South Africa had been discussing tax agreements for some years and there was nothing stopping it from putting its own requirements when negotiating.

Prof Turok agreed that the country was not effectively using the remedies that were available, including in licensing. Every government had the right to impose remedies on licensing, and even in liquor licensing it had laid down certain rules, and there were also licensing requirements on mining. However, he believed that the country was not effectively using the remedies that it already had.

Prof Turok also wanted to comment on the auditors' opinions. If a company did not like the results of the audits the auditor gave, they should not pay them. Accountants and auditors had codes of good practice but in reality audit firms chose who to do audits for, and that was the game. They were employees of companies who paid them and their profit line was important to them. If the companies did not like what the auditors were suggesting, they would simply go to someone else to do their audits. It was no good to look at individuals, because individuals complied with the tradition in their profession, and every profession has a tradition on how to do things and the individuals tended to comply. The tradition was in fact wrong in principle because individual auditors were subordinates to the companies that paid the price, and this problem had been discussed that problem in the Finance committees of Parliament in the past. As long as companies paid external auditors, they tended to toe the line. What Parliament could do was to interrogate the tradition in these professions, to see whether the codes of conduct were being correctly followed and observed.

Prof Turok said that in the House, perhaps Ministers should be asked what institutional arrangements they had to negotiate with business. They should open up that aspect, and explain whether the Minister of Finance had a regular mechanism where he sat with large corporations to discuss any issue that affected government. These hearings were part of finding solutions to the problems confronted by government.

Ms Madonko said that there had been no mention of the World Trade Organisational (WTO) gaps, in terms of the Global Agreement on Tariffs and Trade, which had a role to play in much of those discussions. The WTO had a particular perspective on transfer pricing. If South Africa was going to interrogate those traditions it must also ensure that the dti was strong and capable of representing South African manufacturing in the global arena.

She added that there were MNCs which were interfering with the process of trying to regulate and legislate. One example seen was around patent laws and intellectual property and pharmaceutical companies. This was a classic case of government’s inability to coordinate between the dti and the Department of Health. The Department of Health had come out strongly, because it did understand the costs and the behaviour of the farmers and inability to support South African manufacturing of drugs. However, dti was unable to coordinate and ensure that the legislation didn’t get interfered with by pharmaceutical companies.

The Chairperson thanked all the presenters and said she was looking forward to their next engagement on the matter of transfer pricing.

The meeting adjourned.

 

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