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Abstract
The creation, purchase and exploitation of intangible assets especially within multinational enterprises has seen a steady increase in recent years. This is because intangible assets provide a competitive advantage, improves communication and workforce skills whilst also improving on business and decision making processes. However, this advantage has led to increased profits being realised by multinational enterprises and as such, major concerns were raised over the taxation thereof by tax authorities globally. It is this concern combined with the difficulties faced in attempting to identify and value intangible assets which gave rise to Chapter VI of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (published in July 2017) which is solely dedicated to intangible assets with a specific focus being placed on the treatment of hard-to-value intangibles from a transfer pricing perspective.
In this study, the identification and valuation of various intangible assets, the opportunity for taxpayers to exploit tax loopholes, and the challenges faced by the relevant tax authority were analysed from a South African transfer pricing perspective. In recent years, additional guidance has been introduced by the Organisation for Economic Co-operation and Development in order to assist tax jurisdictions which are currently part of the Base Erosion and Profit Shifting initiative as well as those which have observer status, like South Africa, to protect its tax base. The additional guidance which considers the functions performed, assets used, and risks assumed by each party, along with the newly introduced Development, Enhancement, Maintenance, Protection, and Exploitation analysis assists in determining the appropriate amount of profits that should be allocated to each party involved. In addition to this, further concerns were raised due to complications experienced when attempting to determine the legal owner of the intangible asset from the beneficial owner. Using articles, tax documents, relevant court cases, and tax legislation, the importance of intangibles within multinational enterprises, coupled with the challenges faced from a tax perspective are clearly evident.
It was found that while Section 31 of the Income Tax Act No. 58 of 1962 ensures that all transactions entered into between related parties are concluded by taking the arm’s length principle into consideration, it is ultimately the OECD Transfer Pricing Guidelines, including the BEPS Action Points 8-10 which provide the relevant guidance on the treatment and application of the same when dealing with intangible assets. As such, it would be more beneficial if specific reference to the OECD Transfer Pricing Guidelines had to be made within the ambit of Section 31 of the Income Tax Act No. 58 of 1962.
