Conducting a Transfer Pricing Trial

Introduction

Having prepared and argued at numerous Transfer Pricing trials, I thought it a good idea to commit my journey and experiences to paper. As sort of a guide to others about to travel this path in a tumultuous world where revenue authorities are looking to maximize their tax collections.

The tax world changed substantially in the BEPS era of the early 2020’s where much focus was placed on profit shifting within multi-national entities or MNE’s.  In all the countries I have worked in the field of transfer pricing or TP, revenue authorities have bolstered their legislation with transfer pricing provisions. In some countries they have extended the interpretation and influence of their longstanding general anti-avoidance provisions to extend to TP adjustments – fictitious tax income is deemed to be actual income shifted in a tax-saving series of transactions. The effect is the application of TP adjustments preceding the new TP provisions in the legislation, with manipulated judgments to boot.  The development into this arena has become increasingly popular with many tax authorities.   

At the time of writing, I am and have been involved in transfer pricing related disputes in South Africa, Zimbabwe, Zambia, Malawi, Tanzania, Nigeria, Ghana and Uganda.  All emerging African economies.  All of these jurisdictions have sought the OECD Transfer Pricing Guidelines as guidance.  But in many instances, when it suits the revenue authorities, they have sought to argue that the OECD Transfer Pricing Guidelines are not legislation and not binding in an attempt to justify their recalculation of taxpayers’ transfer pricing related income in raising additional assessments.

When tax disputes go to trial, oftentimes the advocates hired to represent their clients are not specialists in this international tax arena, albeit they are good lawyers.  Thus, the approach tends to be quite myopic around what the legislated provision states, and in particular the meaning of an “arm’s length price” or ALP.  That is simply what an independent supplier is prepared to charge to an independent buyer. And there are many ways to make that determination in interpreting the basic words of the legislation.  Thus, the argument goes, it is  not necessarily dictated to by the OECD Transfer Pricing Guidelines, or the UN Transfer Pricing Guidelines for that matter.  Why are there guidelines better than any other number of processes to determine an ALP?  Such as those used in competition law disputes around areas such as the “willingness to pay” or the “price premium”.  All of which are totally acceptable valuation models used in other areas of law.