1. Presentation to the Portfolio Committee on Trade and Industry Transfer pricing in South Africa 22 April 2015

2. © 2015 Deloitte Touche Tohmatsu Limited2Presentation to the Portfolio Committee on Trade and Industry April 2015 Purpose of Transfer Pricing Rules Transfer Pricing (TP) rules are anti- avoidance rules They are designed to ensure taxpayers do not manipulate prices within multi-national groups, thereby group shifting profits to lower tax jurisdictions This behaviour potentially has the effect of eroding the tax base of the countries with higher tax rates Combined effect is referred to as BEPS TP done in a very similar way around the world.

3. © 2015 Deloitte Touche Tohmatsu Limited3Presentation to the Portfolio Committee on Trade and Industry April 2015 Impact on Industrialisation TP rules themselves are probably neutral as regards promoting industrialization; 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 industrialized or not. They follow the inherent attributes of the economy. However, TP rules based on international best practice provide investors with certainty. They also protect the tax base of the relevant country. They can be compared to a tug-of-war (between authorities) Therefore they are an essential part of any tax system (except for very low tax jurisdictions)

4. © 2015 Deloitte Touche Tohmatsu Limited4Presentation to the Portfolio Committee on Trade and Industry April 2015 Impact on Real transformation on Economy TP rules neutral here as well: do not promote any specific economic policy. However, protection of tax base and promotion of investor certainty equally vital in this context.

5. © 2015 Deloitte Touche Tohmatsu Limited5Presentation to the Portfolio Committee on Trade and Industry April 2015 The global standard The OECD adopts the arm’s length standard as the globally accepted standard for transfer pricing – it eliminates the opportunity for Multinationals to manipulate pricing between entities within the same group. The Transfer pricing Guidelines adopts this standard as guidance for the application of Article 9 of the Model Tax Convention (MTC). South Africa widely adopts the MTC in the treaties it signs to avoid the incidence of double tax. The TP Guidelines are a consensus document of Working Party 6 of the Centre for Tax Policy at the OECD of which South Africa is an observer and active contributor. This is critical to align with the tax policies adopted by most of South Africa’s trading partners. This ensures each jurisdiction is able to tax its fair share of the profit.

6. © 2015 Deloitte Touche Tohmatsu Limited6Presentation to the Portfolio Committee on Trade and Industry April 2015 The global standard The United Nations Practical Manual on Transfer Pricing also endorses the arm’s length principle. South Africa has adopted the arm’s length standard in its domestic transfer pricing rules and endorses this as the globally accepted standard. South Africa has been and continues to be an active contributor to the various discussions at Working Party 6 in relation to on going transfer pricing developments, including discussion on BEPS.

7. © 2015 Deloitte Touche Tohmatsu Limited7Presentation to the Portfolio Committee on Trade and Industry April 2015 South African transfer pricing rules Originated in 1995 and provided a discretion to the Commissioner to adjust consideration paid or received if transaction not arm’s length. Recognised the importance of the global standard and endorsed this in the legislation borrowing heavily from countries such as Australia and New Zealand (both OECD member countries). One of the first countries in Africa to adopt specific transfer pricing rules. Has recruited and developed a dedicated transfer pricing audit team at SARS to audit potential transfer pricing mispricing. Result is revenue generation of approx. R5bn over last three years from 30 audits and adjustments totally R20bn. South Africa also one of the lead countries in noting that the legislation had weaknesses and needed overhauling.

8. © 2015 Deloitte Touche Tohmatsu Limited8Presentation to the Portfolio Committee on Trade and Industry April 2015 South African transfer pricing rules New legislation brought in affective from 2012 year. More closely aligned the global standard as endorsed by Article 9 of the MTC to extend the legislative teeth to adjust not just the consideration, but any of the terms and conditions of a transaction. Changed the transfer pricing rules to a self assessment provision. Introduced a secondary adjustment mechanism. New rules are more closely aligned to the global standard and are ahead of many other countries e.g. Australia.

9. © 2015 Deloitte Touche Tohmatsu Limited9Presentation to the Portfolio Committee on Trade and Industry April 2015 BEPS Four actions focusing on transfer pricing Improved documentation and country by country reporting Transfer pricing of intangibles Focus on high risk transactions such as management services.

10. © 2015 Deloitte Touche Tohmatsu Limited10Presentation to the Portfolio Committee on Trade and Industry April 2015 South Africa legislative remedy supporting transfer pricing and BEPS Introduction of interest limitation rules and anti- avoidance rules for hybrid instruments. Introduction of broader withholding tax rules. Restrictions on deductions for certain IP transactions. Exchange control restrictions impacting ability to pay certain fees. Self assessment provisions and inherent requirement for transfer pricing documentation requirements. IT14 and IFRS disclosure requirements for cross border transactions Stringent CFC rules. Davis Committee recommendations.

11. © 2015 Deloitte Touche Tohmatsu Limited11Presentation to the Portfolio Committee on Trade and Industry April 2015 Weaknesses and areas of development Resource capacity at SARS to implement audit plan. Strong reliance on use of Alternate Dispute Resolution to resolve transfer pricing disputes as opposed to litigation or Mutual Agreement Procedure which provides for greater certainty. No APA program which encourages greater compliance and eases international trade and direct foreign investment. Lack of certainty in terms of outdated Practice Notes (2 and 7) and delay in issue of final IN. Limited guidance on implementation of new secondary adjustment mechanism and interaction with the Double Tax Agreements.

12. © 2015 Deloitte Touche Tohmatsu Limited12Presentation to the Portfolio Committee on Trade and Industry April 2015 Summary and conclusions South Africa adopts and implements the recognised global standard for transfer pricing. Its legislation is world standard being ahead of many developed countries. It is an active contributor to global best practice through its input to Working Party 6. SARS has already adopted and implemented many legislative remedies to counter BEPS and is ahead on disclosure requirements for transfer pricing. South Africa has robust measures through CFC rules and Exchange Controls to compliment the already robust transfer pricing legislative regime. SARS has recognised the need for greater certainty in transfer pricing and is considering an APA program. SARS also notes that transfer mispricing is not a major concern in the mining industry.

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