On 7 January 2021, in the case of: ABC (Pty) Ltd v. Commissioner (IT 14305) [2021] ZATC 1,  the South African Court upheld a transfer pricing  adjustment for a taxpayer that failed to have transfer pricing documentation to support the arm’s length nature of cross-border related-party transactions and dismissed ABC Ltd’s application for separation.

The case involved a South African affiliate that manufactured catalytic converters and sold them to third-party vehicle manufacturers. This affiliate purchased platinum group metals (PGMs) from a Swiss affiliate which was mixed with other chemicals to create a coating for substrates as part of the manufacturing process.

The taxpayer asserted that the intercompany prices were consistent with market pricing. As such, the taxpayer argued that the appropriate approach for the evaluation of the intercompany pricing was the comparable uncontrolled price approach.

The only financial information provided in the court decision is that the South African affiliate’s operating profits represented a 1 percent markup over total costs during 2011.

This cost base included the intercompany payments for the PGMs and other raw materials and the affiliate’s labor costs. SARS used an application of the TNMM to assert an increase in operating profits equal to approximately 114.16 million South African rands, which translated into over $15.7 million using the 2011 exchange rate between the South African rand and the US dollar.

The court noted that SARS had selected allegedly comparable manufacturers and that the adjustment was based on the median markup over total costs. The court did not identify these alleged comparable companies or what this median markup was. In fact, the court decision provided no information on the South African affiliate’s financial information, such as the composition of its total cost base or the assets utilized by the manufacturing affiliate.