Transfer pricing is a significant taxation problem facing both tax authorities andmultinational enterprises. Tax authorities around the world regulate transfer pricingthrough tax legislation, which requires that cross-border transactions withinmultinational enterprises be at arm’s-length. A number of countries in theinternational community have amended their transfer pricing tax legislation to beprescriptive by including regulations in their legislation on how to transact at arm’slengthprice.This research study presents an argument that the South African transfer pricing taxlegislation is non-prescriptive as it does not have regulations on how to transact atarm’s-length price. With reference to the transfer pricing guidelines issued by theOrganisation of Economic Development and Corporation and the experience of theUnited States of America in the enforcement of transfer pricing, this research studyexamines whether or not the South African transfer pricing tax legislation should beamended to be prescriptive by including regulations on how to transact at arm’slengthprice.The research findings reveal that to a certain extent the South African transfer pricingtax legislation is consistent with the transfer pricing guidelines issued by theOrganisation of Economic Development and Corporation, but to a certain extent it isnot. The research findings also reveal that non-prescriptive legislation has in the pastcreated a problem in certain countries. Furthermore, the research findings revealthrough an analysis of the United States of America’s transfer pricing enforcementexperience, that prescriptive transfer pricing tax legislation in a tax system has apositive impact.Recommendation is therefore made in this research study that the South Africantransfer pricing tax legislation should be amended to be prescriptive by includingregulations on how to transact at arm’s-length price.viiiKeywords of the study: arm’s-length price, arm’s-length principle, income tax, IRS,multinational enterprise, non-prescriptive, OECD, Practice Note 7, prescriptive,SARS, section 31, section 482, South Africa, tax legislation, taxation, tax law, taxauthority, transfer pricing, transfer pricing methods, United States of America.
