South Africa: Comparable uncontrolled price method held most reliable method (court decision)
A court decision concerning whether comparable uncontrolled price method was the most reliable method.
The first court in South Africa to address the technical application of transfer pricing methods held that the comparable uncontrolled price (CUP) method was the most reliable method based on the facts of the particular case.
Summary
The tax authority assessed additional tax on the taxpayer, a multinational South African telecommunications company, arguing that the flat royalty fee of 1% of revenue charged by the taxpayer to its foreign subsidiaries for the right to use its intellectual property (IP) did not represent an arm’s length royalty. The taxpayer appealed the tax authority’s assessment.
Four experts testified as to the appropriate methodology to determine the arm’s length royalty charge. Of the three experts who testified for the taxpayer, two testified that transactional profit split method (TPSM) was the most reliable method, and the third relied on the CUP method. The tax authority’s expert also relied on the TPSM.
The court rejected the TPSM and relied on the CUP method. The court found that because the royalty charged by the taxpayer to its foreign subsidiaries was identical to the royalty the taxpayer charged to a former Cyprus subsidiary that was sold to a third party, the royalty charged by the taxpayer was arm’s length. The court rejected the tax authority’s argument that because the taxpayer and the Cyprus entity were once associated, reliance of the CUP method was flawed.
Read a March 2024 report prepared by the KPMG member firm in South Africa