ATC150521: Report of the Portfolio Committee on Trade and Industry on the colloquium on the relationship and impact of transfer pricing on beneficiation or value addition as set out in the Industrial Policy Action Plan and on broadening participation as outlined in the Broad-Based Black Economic Empowerment Act, dated 20 May 2015

Trade and Industry

Report of the Portfolio Committee on Trade and Industry on the colloquium on the relationship and impact of transfer pricing on beneficiation or value addition as set out in the Industrial Policy Action Plan and on broadening participation as outlined in the Broad-Based Black Economic Empowerment Act, dated 20 May 2015

The Portfolio Committee on Trade and Industry, having engaged with several stakeholders on the impact of the misuse of transfer pricing on South Africa’s ability to industrialise effectively and achieve economic transformation, reports as follows:


1.     Introduction 


In 2007 the Industrial Policy Action Plan (IPAP) was adopted as the implementing plan for transforming the South African economy into an industrialised economy. The plan was adopted in response to the country’s need to grow the economy, eliminate poverty and unemployment, reduce inequality and create sustainable livelihoods. The sixth iteration of  IPAP (IPAP 2014/15-2016/17) gives clear guidelines of what should happen to industrialise the economy, such as ensuring that the focus is shifted towards value-adding sectors with high employment and high-growth multipliers, in particular: metal fabrication, capital and rail transport equipment; aerospace and defence; green industries; clothing, textiles, leather and footwear; agro-processing and biofuels; plastics, pharmaceuticals, chemicals and cosmetics; and mineral beneficiation. These production-driven sectors are fundamental to ensuring sustainable economic growth and job creation.


The importance of a developmental price for raw minerals in relationship to manufacturing and production was highlighted in the public hearings and colloquiums which explored and deliberated on the impact of administrative prices, import parity pricing, a reliable energy supply, and the decision in the fifth term to shift South Africa higher up the value chain. Issues around transfer pricing, notwithstanding its legal nature and mis-pricing and financial leakages were re-emphasized in the colloquium which encompassed beneficiation and which was published on the ATC in November 2014.


The 2014/15-2016/17 IPAP iteration recognises that the manufacturing sector is essential for a move towards a value-adding, job creating economy. While a number of sectors have been identified as being fundamental to the growth of the economy and job creation, IPAP also emphasises that “minerals downstream beneficiation and mineral upstream (inputs) have been identified as a key pillar of SA’s reindustrialisation push[1]”. In this regard, the ability to “move up the value chain”, or beneficiate the country’s mineral and natural resources, is critical and has been identified as one of the key drivers for industrialisation.


As part of its oversight function, the Portfolio Committee on Trade and Industry has ensured that factors that may hinder or disincentivise the development of the manufacturing sector are identified through engagements with various stakeholders which include government, the private sector and representatives from the labour sector. In the past, relatively high input costs, the unreliable supply of energy and high administrative prices, particularly in the transport sector, had been identified as factors that may disincentivise the promotion of value-addition in the economy.


In 2014 the committee held a Colloquium on Beneficiation.  The main objective of the colloquium was to engage with specialists, practitioners and other relevant stakeholders to discuss the concept of value addition through mining and manufacturing beneficiation of South Africa’s mineral and natural resources, and identify factors that limit opportunities for increased beneficiation in the country, as well as possible solutions to address the identified constraints in moving the manufacturing sector higher up the value chain.


South Africa’s mineral resources are directly linked to global value addition. The strategic development of five mineral value chains, namely iron ore and steel, titanium, platinum group metals, precious metals and jewellery and mineral inputs, can shift South Africa to a higher value trajectory with a corresponding increase in gross domestic product (GDP) and value of exports. One of the key priorities of the Mineral Beneficiation Action Plan is to support the establishment of production plants closer to mineral deposits and to use Special Economic Zones as a vehicle for the promotion of productive investment and more competitive exports.


Inputs from stakeholders identified a number of factors that may impact adversely on beneficiation or the progress that has been made thus far in industrialising the economy. These include: Monopoly pricing practices of key inputs such as steel and polymers; high administrative costs, such as electricity tariffs and port charges; and lack of co-ordinated implementation of the industrial policy, regulation and other policy changes to expand the economy among the various government departments.  In terms of the mining sector, in particular, the IPAP advocates for beneficiation of the country’s natural resources.  Value addition, particularly of mineral resources and other natural resources, is directly related to job creation, especially in downstream value addition. It was noted that an accelerated shift was required towards rapid, sustainable and inclusive development in the beneficiation of raw materials and the development of industry-wide value chains. However, it was pointed out that factors such as transfer pricing limited opportunities for expanded beneficiation.


During the Colloquium on Beneficiation, transfer pricing and its implications for the economy, in terms of tax base erosion, real/radical economic transformation, the country’s ability to beneficiate mineral resources, and social development in communities where mines are based. While the phenomenon of transfer pricing is not unique to the mining sector, it is more prevalent in the sector.


The committee undertook to engage stakeholders to further explore transfer pricing, particularly with the aim of determining the extent to which transfer pricing can hinder beneficiation (more broadly industrialisation) and broader economic transformation, which are the core mandates of the Department of Trade and Industry. This is of particular importance given the contribution that value addition can have in increasing the manufacturing sector’s ability to create jobs and the need to address factors that may impede the progress of the industrialisation drive.


The Standing Committee on Finance (SCOF) has also undertaken to explore transfer pricing from a tax base erosion and profit shifting (BEPS)[2] perspective. SCOF is currently considering global changes in relation to the mechanisms than can be used to address BEPS. Developing countries such as South Africa rely heavily on corporate income tax, particularly from multinational companies; hence protecting the country’s tax base is crucial. The committee agreed that it will engage the SCOF on its findings to inform a joint position on transfer pricing.


Transfer pricing is mainly associated with issues of tax, and when done in a correct manner it is legal. However, manipulating prices to shift profits within a company or among its subsidiaries to other countries is an unacceptable practice and is called “mispricing”, “incorrect pricing”, or “unjustified pricing”[3]. This practice may have implications that go beyond tax base erosion. The practice of mispricing may have an impact on economic development, broadening participation (unencumbered ownership), value addition (resource optimisation), employment in terms of decent wages, labour empowerment and welfare, and on investment decisions, as profits are artificially shifted offshore. These practices include the following: 


  • 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;
  • Thin-capitalisation;
  • Transfer between two South African based companies which are connected but the transfer is towards the company carrying an assessed loss which is used to reduce prices; and
  • Exchange rate misreporting.


1.1.      Purpose of the hearings


The purpose of the hearings held by the committee was to develop a position regarding the other economic impacts of transfer mispricing to feed into the SCOF’s process and contribute to a joint position on the matter. The committee invited a number of experts and institutions to engage on the impact of transfer pricing practices on the South Africa economy, particularly in relation to industrialisation and black economic transformation or empowerment.


The stakeholders included representatives from the industry, academia, labour and government. The committee engaged with the following stakeholders and institutions:


  • Mrs B Radebe, President of the South African Mining Development Association (SAMDA)
  • Mr P Tamane, Chairperson: SAMDA
  • Mr N Shivambu, Member of Parliament, Economic Freedom Fighters (EFF)
  • Hon Justice D Davis, Davis Tax Committee
  • Mr L Brukwe, National Union of Mineworkers (NUM)
  • Prof B Turok, Institute for African Alternatives (IFAA)
  • Mr M Madula, Department of Trade and Industry (DTI)
  • Mr B Joubert, Deloitte
  • Prof J Hattingh, Department of Commercial Law, University of Cape Town (UCT)
  • Mr D Forslund and Ms T Paremoer, Alternative Information and Development Centre (AIDC).


Professor B Turok outlined progress by industry and Government in relation to engagements on transfer pricing. This focused on mineral value chains activities as well as on determining beneficiaries of such activities.


1.2.      Purpose of the report


This report outlines the crucial issues emanating from the interactions with the stakeholders. It seeks to highlight the challenges emanating from the practice of transfer pricing in South Africa on economic development; broadening participation (unencumbered ownership); value-addition (resource optimisation), employment in terms of decent wage, labour empowerment, and welfare; and on investment decisions, and then propose recommendations for improving and arresting the practice. These recommendations will feed into SCOF’s process. However, it is important to note that the Portfolio Committee on Trade and industry will focus on issues that affect broadening participation and industrialisation. 


2.     Transfer mispricing


Transfer pricing is basically defined as the setting of the price for goods sold and services provided between two controlled legal entities within an enterprise situated in different countries. An example of this is when a subsidiary company operating in South Africa sells goods to a parent company in another country. The cost of those goods is the transfer price. Another example is when a subsidiary company operating in South Africa sells goods to a parent company in another country which provides services to the subsidiary company in South Africa. The price that is paid for the services by the South African-based company is also a transfer price.


This phenomenon is said to be legislated under the Income Tax Act, Act No. 58 of 1962. Sections 9D and 31 of the Act requires that transactions between a controlled foreign entity and its subsidiary must be at arm’s length, meaning that the parties involved in transactions behave as independent entities. The Act was amended in 2012. These amendments strengthen the role of the South African Revenue Service (SARS) by not only ensuring that there is arm’s length pricing, but that there is consideration of the entire relationship between the entities. Therefore, according to the law transfer pricing is legal.


However, the engagement with stakeholders revealed that in practice transfer pricing is not always done as envisaged in law. Examples of such practices were:


  • “The term ‘transfer pricing’ is 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 is often lower. Some producer companies’ sell the company’s commodities to its marketing divisions at lower than market-related prices”.[4]
  • “The selling of goods and services (particularly commodities) at a lower price than when the arm’s length principle is applied in order to pay lesser taxes in the country of production and overpricing the services a multinational corporation receives for intangible services from its subsidiary corporation located in a tax haven”.[5]
  • Forms of transfer pricing include: “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; transfer between two South African based companies which are connected, but the transfer is towards the company carrying an assessed loss which is used to reduce prices; and exchange rate misreporting”[6].


According to Justice D Davis, transfer pricing in its true form is not illegal; however, when transfer pricing practices include price manipulation it becomes illegal. Prof J Hattingh concurs with this view, and notes that when transfer pricing comprises price manipulation (lowering or  inflating prices artificially), it is no longer transfer pricing that is legal; it is instead what he refers to as “mispricing”, “incorrect pricing”, or “unjustified pricing”. When mispricing occurs, profit is shifted to another country and the profits are no longer available to develop the source country’s economy. Consequently, the country, South Africa for instance, remains disadvantaged in terms of workers who work under unacceptable working conditions and have poor quality of life working for companies that shift profits through transfer pricing practices. In addition, SAMDA noted that transfer pricing is also practice through the legal loopholes of tax legislation. Action should be taken to close tax evasion loopholes such as transfer pricing.   


In transactions between a company and its subsidiary operating in different countries with different tax rates/systems, companies can avoid tax or shift profits. Given the implications of the phenomenon of transfer mispricing, the committee was concerned about the availability and reliability of statistics on the phenomena of transfer mispricing. It seems as if there are different sources, including the Africa Monitor, which quote different financial scales of transfer mispricing. Justice D Davis referred the committee to the SARS’ recent investigations on the extent of transfer mispricing, which indicate the magnitude of transfer mispricing in South Africa.


The committee raised the issue that the recommendations, such as those from the Organisation for Economic Co-operation and Development’s (OECD) BEPS Report, may not be easily adaptable to South Africa’s unique conditions. Furthermore, the committee were of the view that it would be difficult to implement the OECD’s transfer pricing rules in South Africa, given the capacity issues in SARS that were mentioned by Justice D Davis. In addition, it was noted, that unlike other countries that have implemented these recommendations, South Africa is at a critical stage in the process of industrialisation and making efforts to ensure broadened participation through black ownership. Measures to address the issue should be tailor-made to suit the socio-economic conditions of South Africa. In addition, the recommendations are focused on addressing the impact on transfer mispricing on tax shifting rather than on other economic impacts. The committee, therefore, said that the impact of mispricing on workers’ wages and working conditions should not be understated.


3.     Impact of transfer pricing on the South African economy


As noted previously, transfer pricing may have broader implications for the economy than erosion of the tax base. Profit shifting that results from transfer mispricing, under reporting of commodity prices, non-reporting of full range of products sold, and inflated expenditure used to reduce profits locally among others moves financial resources could have been used in South Africa to compensate South African BEE partners or to improve remuneration of employees or provide for rural social and labour plans, which impacts on broader economic participation, the country’s ability to beneficiate mineral resources and socially develop communities where mines are based. In particular the following; economic development; broadening participation in terms of unencumbered ownership; value-addition (resource optimisation), employment in terms of decent wages, labour empowerment, and welfare; and investment.


3.1.      Implications for transformation


The Broad-Based Black Economic Empowerment (B-BBEE) Strategy and Act advocate for the advancement of economic transformation and enhancement of economic participation of black people in the South African economy. The principles of black economic empowerment are set out in the Black Economic Empowerment Act (Act No. 53 of 2003) and the Broad-Based Black Economic Empowerment Amendment Act (Act No. 46 of 2013).


The targets pertaining to ownership in mining sector are contained in the Mineral and Petroleum Resources Development Act (MPRDA), Act No. 28 of 2002, as well as in the Mining Charter. According to the Mining Charter and Section 100 (2)(b) of the MPRDA, there should have been 26 per cent black ownership in the mining industry by 2014.  According to SAMDA this target has not been reached, partly a result of transfer pricing. Furthermore, the Mining Charter in terms of section 100 (2)(a) of the MPRDA also requires the following of the mining companies in South Africa: the involvement of Employee Ownership Schemes (ESOPs); Union Investment Companies; Community Trusts; Broad-Based Business Trusts; BEE Technical Producers; women, youth and people living with disabilities in the mining sector.[7] In addition to the 26 per cent ownership that is stated in the MPRDA, it should be noted that this should be 26 per cent unencumbered net value ownership to enable meaningful economic participation.


Black people may own mines on paper but not in the true sense of ownership, because the loans through which the shares were acquired have not been settled. Community trusts do not receive what is due to them and initiatives aimed at ensuring that there are women, youth and people with disabilities in the mining sector are not supported as they should be. This is often due to the deprivation, through transfer mispricing of profits, which should have been available for these initiatives.  Furthermore, it was noted that companies that are involved in transfer mispricing practices continue to have their mining licences renewed despite non-compliance with mining legislation and the Mining Charter.  The companies in default of the law should be penalised, in terms of the legislation, and not rewarded.[8]


Moreover, the National Union of Mineworkers (NUM) summarised this as follows:


  • Reduction in profits: no dividend declared to minority shareholders (including ESOPs trusts).
  • No/smaller dividend declared: employees not sharing in company profits.
  • No profits: non-economically, meaningful trusts/schemes for employees.


The committee was of the view that this situation was unacceptable. It acknowledged that South Africa has made strides in ensuring broadened participation of previously disadvantaged individuals in economic activities. However, the issues of real ownership by black people is not becoming a reality, as lost profits through transfer pricing undermine efforts that have been made in this regard.  



3.2.      Implications for industrial development


South Africa has embarked on a journey to eradicate the triple challenges of poverty, unemployment and income inequality through industrialisation that will facilitate job creation. In industrialising the country the role of investment is important. Investment into the productive sectors of the economy is essential in ensuring value addition and accelerated employment creation. The IPAP is the country’s industrialisation plan that outlines how it can be achieved. In addition, the MPRDA, particularly section 26 of the Act, deals specifically with the promotion of beneficiation of minerals in the country, and that strategic minerals are identified to ensure that its beneficiated in the country..  


Stakeholders were concerned about the impact of transfer pricing on industrialisation. Instead of profits being re-invested in the country, profits exit in the form of transfer misprices, which discourages industrialisation. Mr B Joubert from Deloitte noted that there are transfer pricing rules which currently serve as a guide for transfer pricing for countries. However, he says that current transfer pricing rules do not necessarily promote industrialisation.


The committee questioned whether the transfer pricing rules do encourage industrialisation and are appropriate for the South African economy.  In response, Prof Hattingh said that transfer pricing rules are neutral in regard to the promotion of industrialisation. He further noted that “…their purpose is simply to achieve arm’s length profits across value chain. Therefore they are designed to achieve arm’s length profits regardless of whether a particular economy is highly industrialised or not. They follow the inherent attributes of the economy”. The committee, as well as SAMDA, NUM and AIDC, disagrees that transfer pricing is neutral.  


3.3.      Social development Implications


In a submission made to the committee, SAMDA noted that due to transfer pricing in South Africa’s mining sector:


  • Outflows from the mining sector exceed local spend significantly;
  • Projects committed to are underfunded because of a perceived loss of profitability; and
  • Infrastructure commitments are scaled back and delayed.


Consequently, funds that could be used to develop communities where mines are based or to fulfil the social and labour plans are lost. Minimising the tax payment by the mining companies to the national fiscus through transfer pricing, also means that there are reduced funds available to the Government for the following:


  • Rural Renewal Projects;
  • Infrastructure development;
  • Education;
  • Health;
  • Housing;
  • The absence of unencumbered net value in the Charter lead to BEE companies not being able to own shares and then being in breach of the ownership element of the Charter not being fulfilled.
  • Food Security; and
  • Youth Empowerment Initiatives.


Furthermore, it was noted that, as companies engage in transfer pricing, less money is available to pay employees. This is evident in the mining sector where mining companies are usually unable to increase salaries despite the amount of minerals they extract, which indicates that they should be profitable. In terms of mining employees, the National Union of Mineworkers (NUM) focused on the adverse impact on employees as a result which include:


  • Retrenchments of employees;
  • Low and unequal salaries/wages for employees;
  • Inadequate investment in skills development;
  • Poor implementation of social and labour plans and community projects; and
  • Less investment in meeting health and safety standards (resulting in injuries and fatalities).


3.4.      Tax implications


Corporate income tax is derived from the net income companies earn during a specific financial year. Corporate Income Tax is revenue for the South African government, which is the third largest source of income tax in the country. South Africa has a corporate tax rate of 28 per cent. In the 2013/2014 financial year, the South African Revenue Services (SARS) collected a total of R179.5 billion in corporate income taxes, which accounted for 19.9 per cent of South Africa’s total tax income for the financial year.[9]


One of the consequences of transfer pricing and illicit outflows is the erosion of the tax base[10]. The term Base Erosion and Profit Shifting (BEPS) refers to the adverse effect of multinational companies' tax avoidance strategies on national tax bases. When companies employ tax avoidance strategies through transfer pricing, or "transfer mispricing" as referred to by Prof J Hattingh, they reduce the value of assets from which tax is levied, which results in a reduction of tax collections.  


According to Justice D Davis, in 2012, when SARS did an investigation on transfer pricing, it collected approximately R1.1 billion. This is an indication of the magnitude of transfer pricing in the country. Had this investigation by SARS not been done, the country would have lost that R1.1 billion of tax revenue. Large sums of money leave the country illegally both through the action of individuals and corporates. A recent examples that seemed like a case of transfer pricing is that of Lonmin that used a Bermuda company to procure marketing and other services and in the process saved approximately R280 million in tax in South Africa. While this is not a proven case of illegal transfer pricing, it is one of the cases that warrants an investigation. An implication of transfer pricing is that, as companies move money illegally out of the country, tax that is due to the country is not charged and hence less tax is available than would have been in the case where transfer pricing had not occurred.


To ensure it has the necessary capacity to deal with these cases, SARS should increase its human resource capacity to audit compliance with the established transfer pricing legislation and guidelines. Whilst there is good legislation, the lack of resource capacity hinders the implementation. Currently the division in SARS that deals with transfer pricing is under capacitated, with only 20 staff members including administrative support. This number is just a drop in the ocean compared to other countries’ revenue collection agencies that have hundreds of employees dealing with transfer pricing issues. In addition, there should be more transparency in South Africa’s mining industry, in relation to its contributions of corporate taxes and all other government earnings from the industry as envisaged in the Income Tax Act.


The consequences of unacceptable transfer pricing go deeper than just the erosion of the tax base. Consequences include limited transformation, and reduced monetary base for living wages and local investment.



4.     Proposals by stakeholders


The following proposals for political, economic and technical interventions to address transfer mispricing were presented by the various stakeholders:


4.1.      Political interventions


  • SARS, through building adequate internal capacity, should monitor the movement of goods and services.


  • The Financial Intelligence Centre should be given a Parliamentary and/or Presidential mandate to conduct a forensic commission of inquiry and report to Parliament in order to guide appropriate actions, such as prosecutions in the case of aggressive tax avoidance, and legislation where the law falls short.


  • Investigation and prosecution authorities should, through thorough criminal investigations, prosecute managers who engage in deliberate tax avoidance schemes.


  • The South African Reserve Bank should develop a different approach to trade liberalisation and loosening of exchange controls because the outcomes envisaged by the Growth, Employment and Redistribution (GEAR) policy have not been realised.


  • Exchange control legislation should be updated and tightened, and the National Treasury and South African Reserve Bank should consider mechanisms to make South Africa much less vulnerable to both corporate transfer pricing, and to more general predatory behaviour by multinational corporations, international merchants and the world’s financial institutions. Even the International Monetary Fund has recently shifted its own policy thinking, much more in favour of capital controls.



4.2.      Economic interventions


  • The vehement refusal by the current mining bosses that mines should be nationalised and that the State should play a role in mining is not an economic argument, but protection by the criminal tax avoidance practices that exist in the sector.


  • The South African Reserve Bank’s mandate should include combatting 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 reconceptualised with an understanding that South Africa has suffered high volumes of illicit financial outflows and transfer pricing.


  • SAMDA expressed the view that ‘Companies exploiting our mineral wealth must have their primary listing here in South Africa or that they are at least domiciled in SA and the marketing of products through offshore marketing and trading companies are the main causes of transfer pricing. The marketing and trading of commodities produced in South Africa should be done from South Africa and the invoicing should be from South Africa and the income must be returned to South Africa.


  • South African owned producers of mining commodities, goods or services in South Africa should be listed and domiciled in South Africa e.g. Anglo American and others. They can have secondary listings outside South Africa.


4.3.      Technical interventions


  • Audit companies should ensure that board members (especially the finance and audit committees) adhere to Transfer Pricing Rules.


  • Finance institutions and banks should not do financial transactions with organisations that are involved in transfer pricing.


  • Commercial law firms, when advising clients, should insist on structuring legal agreements that adhere to Transfer Pricing Rules.


  • Government parastatals and development funders must at all times ensure that investments they make are not into companies that participate in transfer pricing.



5.     Conclusions


  1. Although transfer pricing is not illegal, the practice of manipulating prices by a company in order to shift profits from a subsidiary to another part of the company in a different country to avoid taxes is unacceptable and has an adverse impact on the country’s industrialisation drive and the broadening participation efforts of the Government. This practice of transfer pricing should be discouraged.


  1. The committee is of the view that it is also fraudulent to reduce profits, underreport income and to conduct exchange rate misreporting, as these practises reduce the country’s tax income.


  1. The reduced revenue as a result of transfer pricing impacts negatively on the following:


  • Workers’ wages and working conditions.
  • Profits available to pay dividends to BEE partners.
  • The development of social infrastructure in mining towns.
  • Transfer pricing leads to a negative balance sheet that in turn leads to mining charter non-compliance and non-adherence to the Broad-Based Black Economic Empowerment Codes of Good Practice.


  1. Greater commitment is required in terms of co-ordination among departments to ensure that legislative imperatives are not compromised and that the relevant legislation is implemented in a manner that ensures their objectives are met. 


  1. The successful implementation of relevant legislation and regulations in support of broadening participation should be pursued. This includes the:


  • Broad-Based Black Economic Empowerment Amendment Act, Act No. 46 of 2013 administered by the Department of Trade and Industry that advocates for a share of the country’s wealth to be owned by previously disadvantaged individuals.


  • Mineral and Petroleum Resources Development Act, Act No. 28 of 2002, particularly section 100(2), and the Mining Charter administered by the Department of Mineral Resources, that advocates for 26 per cent black ownership, which should translate into unencumbered ownership or ownership that is debt free.


  1. The formulation of a developmental price for strategic minerals may discourage the practice of mispricing that emanates from the exporting of minerals at a lower price encourage higher beneficiation of our mineral and natural resources locally, and therefore expand the mineral beneficiation value-chain. However, in considering the implementation of developmental pricing, consideration should be given to the negative effects of such a policy position, and how such consequences will be mitigated.


  1. The successful implementation of relevant policies, legislation and regulations in support of the industrialisation drive in the upstream mining and beneficiation of strategic minerals should be pursued. This includes the:


  • The Industrial Policy Action Plan, administered by the Department of Trade and Industry, which identifies mineral beneficiation as crucial for the development of the country.
  • The Mineral and Petroleum Resources Development Act, administered by the Department of Mineral Resources, in terms of section 26(3) requires that any person who intends to beneficiate any mineral mined in the Republic outside the Republic may only do so after written notice to and in consultation with the Minister.


  1. The committee intends to engage with the Standing Committee on Finance on the issue of transfer mispricing in relation to tax legislation, and the Portfolio Committee on Mineral Resources on the implementation of the MPRDA. Companies in breach of the Mining Charter and the BBBEE Codes of Good Practice should be penalised. 


  1. The committee is of the view that illegal transfer pricing constitutes tax evasion and not tax avoidance. Therefore, the Government should significantly strengthen tax legislation to increase penalties for illegal transfer pricing.


  1. The Government should strengthen the South African Revenue Service’s capacity to enforce this legislation, to investigate and pursue perpetrators of illegal transfer pricing, and to recover funds that would otherwise be lost to the country.


  1. Parliament should consider starting a multi-disciplinary process of developing anti-tax avoidance legislation.


6.     Acknowledgements


The committee also wishes to thank its support staff in particular the Committee Secretaries, Mr A Hermans and Mr T Madima, the Content Advisor, Ms M Sheldon, the Researcher, Ms Z Madalane, the Committee Assistant, Mr D Woodington, and the Executive Secretary, Ms T Macanda, for their professional support and conscientious commitment and dedication to their work.  The committee wishes to thank the Department of Trade and Industry as well as the Department of Mineral Resources for their contribution during the process of engagement. The Chairperson wishes to thank all Members of the committee for their active participation during the process of engagement and deliberations and their constructive recommendations reflected in this report.


7.      Recommendations


Informed by its deliberations, the committee recommends that the House requests that the Minister should:


  1. Consult with the Minister of Mineral Resources to ensure that the Mineral and Petroleum Resources Development Act and any subsequent mining charter is aligned with the Broad-Based Black Economic Empowerment Amendment Act and its associated Codes of Good Practice.


  1. Consult with the Minister of Finance to consider measures including tax instruments to mitigate against the impact of transfer pricing on the broader economy in line with international best practice.


Report to be considered.





Organisation for Economic Co-operation and Development (2014). Base Erosion and Profit Shifting. Available:


Thabo Mbeki Foundation (2015). Report of the High Level Panel on Illicit Financial Flows from Africa. Available:







[1] Department of Trade and Industry (2014)

[2] Base erosion and profit shifting (BEPS) refers to “tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid” (reference).

[3] Hattingh (2015)

[4] South African Mining Development Association (2015)

[5] Shivambu (2015)

[6] South African Mining Development Association (2015)

[7] SAMDA (2015)

[8] SAMDA (2015)

[9] SARS Tax Statistics (2014)

[10] The tax base is the aggregated value of income, sales or transactions on which a particular tax is levied.



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