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Global crises, such as the 2008 financial crisis, the Covid-19 pandemic, and the recent international trade tensions created by US President Donald Trump, generally result in renewed focus on tax collection, particularly from multinational companies.
Tax authorities will take a closer look at companies’ transfer pricing policies and whether prices are being adjusted because of outside shocks, or whether the tariff increases are a convenient opportunity to shift profits to head office countries, warns Michael Hewson, director at Graphene Economics.
Transfer pricing is the price set when different parts of the same company, like its branches or subsidiaries, buy and sell things from each other — whether it is products, services, or ideas.
Transfer pricing policies influence how much tax a company pays in the countries where it operates. Hewson says companies may react to the punitive tariffs introduced by the US by reducing the price of goods they export to the US in order to remain competitive. The risk is that they will lose market share if they do not make price adjustments to respond to the increased tariffs.
This, says Hewson, may attract the attention of revenue authorities.
“The South African Revenue Service (Sars) may challenge why prices to a related party in the US are now lower than prices to third parties in other countries,” he explains.
Hewson gives the example of a local manufacturer. If a global retailer, which manufactures in China and other markets affected by high tariffs, sells more into SA, the demand for the local manufacturer’s products may reduce.
Especially if the prices charged by the global retailer reduce.This would impact the profitability of the local manufacturer. “These reduced profits may cause Sars to ask whether the lower profits are due to its transfer pricing policy, even though it’s actually impacted by external commercial factors.” — Moneyweb
Online Reporter