Royalties: MTN wins against Sars

• Tax wrangle centres on royalties from 2009-2012

MTN has successfully fended off allegations by Sars that it engaged in transfer pricing activities in its international operations, shortchanging the tax agency. Sars challenged the royalties paid to MTN by its international operations, saying they were kept as low as possible to avoid paying maximum taxes in SA.

Africa’s telecom giant MTN has successfully fended off allegations by the SA Revenue Service (Sars) that it engaged in transfer pricing activities in its international operations, shortchanging the tax agency.

Sars challenged the royalties paid to MTN by its international operations, saying they were kept as low as possible to avoid paying maximum taxes in SA.

The dispute ended up before the tax court, which found Sars overreached in raising additional assessments against Africa’s largest telecom operator. The tax wrangle centres on the royalty payments made by 14 of the group ’ s entities overseas from 2009-2012.

MTN charged all of them the same royalty rate of 1% for the right to use its intellectual property. Sars contended that 1% was not an arms-length royalty and issued an additional assessment to increase the royalty.

An expert procured by Sars put the royalty at 3%, adding to the tax agency’s argument that MTN was underpaying taxes in SA. MTN’s operation that came to Sars’ attention include its operations in Benin, the Democratic Republic of Congo, Ivory Coast, Rwanda, Cameroon, Ghana, Zambia, Sudan and Syria.

MTN argued it had no incentive to charge its operations a lower royalty to avoid paying higher taxes in SA.

It based its argument on data showing that tax rates in the jurisdictions where the international companies were located, were mostly equal to or higher than the SA tax rate.

MTN told the court that it had minority shareholders in most of the offshore entities and that if it were to undercharge the entities through the royalty it would mean it inflated its profits in the companies, which was against its interest and would have resulted in minority shareholders being rewarded with profits that exceeded their holdings.

The tax court agreed with MTN, ruling that it appeared that MTN had no incentive to lower the royalties it received from its international entities.

The outcome of the case would be “of great disappointment to Sars, which put into it extensive resources to create a precedent in this seldom litigated field of tax law”, the court said in its ruling.

“But this not only meant it running contrary to the opinions and approach of its initial expert (which meant effectively dispensing with his views without explanation and engaging a new expert) but fighting a case where there appeared to be no rationale for the taxpayer to have any motive to shortchange the SA fiscus.”

Companies use transfer pricing to reduce the overall tax burden of the parent company. Companies charge a higher price to divisions in high-tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in lowtax countries.

Sars said it could not comment as it was still studying the judgment.

SARS CHALLENGED THE ROYALTIES PAID TO MTN BY ITS INTERNATIONAL OPERATIONS, SAYING THEY WERE KEPT AS LOW AS POSSIBLE