THERE has been a great deal of public commentary in SA over the past 18 months on the question of transfer pricing and illicit financial flows. This is not surprising.

In the past several years, this challenge, which faces many countries, has been rigorously addressed by the United Nations (UN), the Organisation for Economic Co-operation and Development (OECD) and the Group of 20.

Unfortunately, when political advocacy poses as serious research, and when people wanting to present a militant profile stand-up on soapboxes and say anything they please, reality goes by the board. Faulty research and militant rhetoric in SA have blamed everything from perceived unsatisfactory miners’ wage increases to inadequate government revenues to illegitimate transfer pricing. The reality is different.

Transfer pricing is not in itself unlawful or illegitimate. It takes place when there are transactions between different units of multi-national companies.

It is true that mining companies, because many operate in more than one jurisdiction and because a large proportion of their products tends to be exported, are a prominent focus of any transfer pricing discussion.

It is also true that, when a jurisdiction’s transfer pricing regime is unregulated or inadequately regulated, that could enable companies illegitimately to transfer funds between jurisdictions or to misprice transfer in order to gain tax advantages. Hence the need for countries’ tax authorities to have clear rules and regulation, and to be able to implement those rules effectively.

The international standards for transfer pricing regulation are the OECD Transfer Pricing Guidelines for Multinational and Tax Administrations and, given perceptions of developed-country bias in the OECD, the UN Practical Manual on Transfer Pricing. Both advocate the same approach to transfer pricing law and regulation: for transactions within a single group, individual group members must be taxed on the basis that they act at arm’s length in their transactions with one another. If done on this basis, it would be the same as transactions between independent parties, thus eliminating price manipulation and contractual terms designed to facilitate tax avoidance.

Interestingly, though SA has only observer status at the OECD, our officials were involved in the work of the party that developed the guidelines, and also in the development of the UN work on transfer pricing.

The Chamber of Mines recently asked Deloitte to conduct research into SA’s transfer pricing regime and how it measures up to international standards. The Deloitte report notes that SA has adopted the best international standards of the time since the mid-1990s.

"SA now has in place robust and comprehensive transfer pricing rules in accordance with global best practice," the report says. "The administration of the legislation requires a high level of disclosure by multinational enterprises operating in SA in respect of their transfer pricing practices," it says.

And, once again, though SA is an observer rather than a member, "SARS (South African Revenue Service) is to some extent already ahead of the curve in this respect".

A SARS official told Parliament that it has recovered more than R5bn in additional tax over the past three years after auditing more than 30 companies. This involved transfer pricing adjustments of just more than R20bn. We understand that about 40% of this amount involved mining companies. So SARS is obviously doing its job in implementing SA’s high-quality transfer pricing laws. A R5bn recovery is significant. But it is a long way from the huge level of alleged transgression.

There is probably more to come in new rules and implementation measures, as international and local standards develop. The mining industry will not be found wanting in its co-operation with the authorities, nor in scrupulously operating according to its legal obligations.