Hogan Lovells Publications | Tax Alert | July 2016
The transfer pricing effects of Brexit for South Africa
As has been widely reported, the United Kingdom (UK) decided to leave the European Union (EU) as a result of a referendum, on Thursday, 23 June 2016. The consequences of the decision will have a significant effect on the global economy and South Africa in particular.
Through the OECD's Base Erosion and Profiting Shifting (BEPS) movement, consensus was reached on how to identify and avoid profits being shifted to countries where the substance/value-add does not warrant the relevant tax authority to receive the taxable income.
The Brexit vote could change the way the EU approaches and deals with certain controversial matters, one of which is the politically fuelled taxation practice between EU members. Transfer pricing, and in particular the allocation of profits is a hot topic of tax at the moment with each revenue authority seeking to protect their tax base.
There should not be a substantial immediate effect on the transfer pricing practices within the EU. Until Article 50 of the Lisbon Treaty is triggered by the British government, the UK is considered an active member of the EU. Article 50 provides for a two-year negotiating timeframe between the UK and the other remaining EU members. This period only commences after the UK gives formal notice of its intent to leave the EU. The UK may seek time to ensure that trade terms with the EU and other countries are negotiated before such formal notice is given.
The BEPS initiative will bring unprecedented change to global transfer pricing practices through initiatives such as country-by-country reporting and access to financial information. One thing is for sure, the Brexit vote will definitely not have an effect on the globally endorsed arm's length principle. This principle is the cornerstone of transfer pricing and it still applies in the UK.
From a South African point of view, our transfer pricing environment could be slightly affected. In all probability, trading terms between the UK and the EU will have to be renegotiated. This could lead to less favourable trading terms. Countries transacting with the UK, for example South Africa, could also feel the implications. Like many other countries, South Africa uses the UK as a gateway into the EU. South African subsidiaries with UK headquarter companies would feel the knock-on effects when doing business with EU companies due to the changes in the tax treaties.
Where trade difficulty is increased, it is logical to assume that there will be less demand for goods and services from the trading partner. The price of the goods/services exported to or imported from the UK could be adversely affected from a South African point of view.
Should the British Pound continue to decrease in value, South Africa's Rand may yield benefits in its trade with the UK. Contrary to this, other foreign currencies may also strengthen as their demand is increased. This may have a negative effect on South Africa's other foreign trade.
The circumstances and effects above could lead to an adjustment in what is currently considered to be arm's length. Market and industry changes will always influence an arm's length price. It is therefore imperative for multinational corporations to regularly review their intercompany transactions.
Despite Brexit, transfer pricing will continue to be the biggest international tax headache for multinational corporations. Businesses need to continue to ensure that their transfer pricing practices are in order and compliant in the post-BEPS environment.
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