Transfer Pricing 2024 Comparisons

Section 31 of the Income Tax Act, 58 of 1962 (the “South African ITA”) contains the main legislative provisions relating to South African transfer pricing rules.

The South African Revenue Service (SARS) issued practice notes on the application of the transfer pricing and thin capitalisation rules to provide more certainty as to the application of the rules.

• SARS issued Practice Note 7 (PN7) on 6 August 1999, offering practical guidance on the arm’s length principle outlined in Section 31 of the South African ITA and was further completed by an Addendum published on 29 September 2005.
• In addition, SARS issued Interpretation Note 127 (IN127) on 17 January 2023, which provides guidance on the transfer pricing aspects of intra-group financing arrangements. 

South Africa closely follows the guidance contained in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “OECD Transfer Pricing Guidelines”) in respect of transfer pricing matters in the absence of specific South African guidance.

Transfer pricing legislation in South Africa originated in 1995 when SARS acknowledged the need for tackling transfer pricing issues and to prevent profit shifting. Section 31 of the South African ITA was introduced and was augmented by PN7. Subsequently, at various times further amendments were made to Section 31 and other provisions of the South African ITA to align with treaty wording and international practice. For example, in 2011 significant amendments to the transfer pricing rules were introduced. South Africa recently amended its legislation to encompass the international concept of “associated enterprises”.

In addition to legislative changes, SARS issued various pronouncements to offer guidance on transfer pricing issues, notably PN7 and IN127.

South Africa’s transfer pricing rules apply to transactions which are “affected transactions” between people who are “connected persons” or “associated enterprises” in relation to each other and which result or will result in any tax benefit being derived by a person that is a party to the affected transaction. 

The taxable income or tax payable by any person that derives a tax benefit must be calculated as if that transaction, operation, scheme, agreement or understanding had been entered into on the terms and conditions that would have existed had those persons been independent persons dealing at arm’s length.

An affected transaction includes transactions, operations, schemes, agreements or understandings between specified persons that are connected persons in relation to one another and, for years of assessment commencing on or after 1 January 2023, between specified persons that are connected persons or associated enterprises in relation to one another and any term or condition of that transaction, operation, scheme, or understanding is different from any term or condition that would have existed, had those persons been independent persons dealing at arm’s length.

The affected transaction must be entered into between or for the benefit of either or both:

• a resident and a non-resident;
• a non-resident and a non resident that has a permanent establishment in South Africa;
• a resident and non-resident that has a permanent establishment outside South Africa; and
• a non-resident and any other person that is a controlled foreign company in relation to any resident.

The definition of connected persons is contained in Section 1 of the South African ITA and encompasses the following.

• In respect of natural persons – relatives and trusts where the natural person or relative is a beneficiary.
• Trusts – beneficiaries of the trust and any connected person related to the beneficiary.
• Partnerships – members of the partnership or foreign partnership, and any connected person related to a member.
• In respect of companies – other companies considered part of the same group (if more than 50% of equity shares or voting rights are held), companies where at least 20% of equity shares or voting rights are held directly or indirectly, and other companies managed or controlled by connected persons. Close corporations also fall under this definition.
• Any person connected to another person according to the aforementioned provisions.

An associated enterprise means an associated enterprise as contemplated in Article 9 of the Model Tax Convention on Income and Capital of the OECD.

Accepted transfer pricing methods in South Africa follow those set out by the OECD, with an emphasis on the use of the most appropriate method. The practice is that the OECD Transfer Pricing Guidelines are consulted for purposes of selecting the most appropriate transfer pricing method, amongst the:

• traditional transaction methods including:
1. comparable uncontrolled price (CUP) method;
2. resale price method;
3. cost plus method; and
• transactional profit methods including:
1. transactional net margin method; and
2. transactional profit split method.

Taxpayers must employ the most appropriate method among those prescribed by the OECD.

In South Africa, the hierarchy of methods is not applied. Taxpayers are required to use the most appropriate method.

While Section 31 and PN7 don’t establish a strict hierarchy for applying methods, traditional transaction methods are typically favoured, with the CUP method being preferred among them.

Among transactional profit methods, the TNMM tends to be favoured due to its perceived objectivity. However, SARS points out that comparing operating expenses requires a similar structure of business to be truly reliable. This ensures a more accurate assessment of comparability.

Determining the most appropriate transfer pricing method can result in a range of justifiable transfer prices. Within this range, selecting a specific price involves exercising judgement based on various factors.

For traditional transaction methods, a high level of comparability is essential. If the data is comparable and the transaction falls within the established range, it is generally considered to be at arm’s length, meaning it reflects the price that unrelated parties would agree upon in a similar transaction under similar circumstances.

However, where the transaction falls outside the range, the adjustment should reflect the point in the range that best accounts for the facts and circumstances of the controlled transaction; in the absence of persuasive evidence for the selection of a particular point in the range, SARS may select the midpoint in the range.

In practice, SARS generally accepts an inter-quartile range, established after a proper search of comparables on a recognised database, as a reasonable basis from which further adjustments should be made for the particular circumstances of the taxpayer.

SARS warns that the ranges established by application of other methods will be evaluated thoroughly since the methods can result in extensive ranges, some of which may not be sufficiently accurate to permit the general statement that any point in the range may be regarded as arm’s length.

The South African transfer pricing legislation does not contain a specific provision or inclusion for comparability adjustments. However, the OECD Transfer Pricing Guidelines are consulted to provide guidance on comparability adjustments.

Comparability adjustments could take place as a result of various factors which may have an impact on price. 

The South African domestic transfer pricing legislation does not contain a specific provision or inclusion on the pricing of transactions involving intangibles. However, South Africa follows the OECD Transfer Pricing Guidelines, which provide in-depth guidance on pricing of controlled transactions involving intangibles. This is referred to in PN7.

South Africa does not have any special rules regarding hard-to-value intangibles and follows the OECD Transfer Pricing Guidelines in this regard.

South Africa permits cost sharing or cost contribution arrangements (CCAs) which involve multiple parties sharing the costs and risks associated with the development, production, or protection of assets as well as each participant’s rights or interests in respect of such assets.

While South Africa acknowledges the concept of CCAs in principle, there is no specific legislation, regulations or guidelines tailored exclusively to such arrangements. However, the arm’s length standard and the OECD Transfer Pricing Guidelines are typically applied to CCAs in South Africa, ensuring that the contributions made by each party are valued appropriately and reflect the economic realities of the arrangement.

If the preparer of a tax return (ITR14) realises that an error has been made after submission of a return, the Request for Correction (RFC) process allows for the correction of a previously submitted return. This option is available on the relevant tax work page on the SARS e-Filing platform.

An RFC will not be allowed by SARS under the following circumstances.

• The prescribed period to amend an assessment has passed.
• There is a dispute in progress.
• An audit case has been finalised for the same year of assessment.
• A revised declaration or agreed estimate was performed by SARS for the company for the same year of assessment.
• The supporting document(s) has been submitted by the taxpayer after a compliance audit case was created for the same year of assessment.
• An active Limited/Full scope audit case exists for the same year of assessment.

South Africa has entered into various international treaties whereby exchange of information has been agreed. Such agreements have been concluded with Australia, Austria, Belarus, Belgium, Brazil, Bulgaria, Canada, Chile, China, Croatia, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Korea, Kuwait, Luxembourg, Malaysia, Malta, Mexico, Netherlands, New Zealand, Norway, Oman, Pakistan, Poland, Portugal, Qatar, Romania, Russian Federation, Saudi Arabia, Singapore, Slovak Republic, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, Ukraine, United Arab Emirates, United Kingdom and the United States of America.

The Tax Administration Laws Amendment Act, 18 of 2023, under Section 76A, introduced a framework for establishing an advance pricing agreement (APA) programme in South Africa. This section sets out the definition of an APA, its purpose, the relevant application fees, amendments, withdrawal, rejection, processing, compliance, extension and termination of APAs, along with procedures and guidelines.

The programme is administered by a competent authority authorised by government to administer an agreement for the avoidance of double taxation.

The proposed model for establishing APAs has not yet been implemented and accordingly, it cannot be determined at this stage whether there will be co-ordination between the APA process and Mutual Agreement Procedures.

Currently, notice of the limits regarding APAs through publication in the Government Gazette is awaited.

Currently, deadlines, including the form and manner of submission, in respect of APA applications through publication in the Government Gazette, is awaited.

Currently, prescribed fees for APA applications through publication in the Government Gazette is awaited, which may include a pre-application consultation fee, an application fee, a cost recovery fee for processing an APA agreement application, and fees associated with the maintenance or extension of an existing APA.

In South Africa, APAs are valid for a maximum of five consecutive years of assessment. Upon specific request by a taxpayer, an extension of up to three additional years of assessment may be sought from SARS, commencing the day after the conclusion of the last year of assessment.

The proposed model for establishing advance pricing agreements has not yet been implemented. Consequently, it remains uncertain whether APAs will have a retroactive impact until a court determines whether APA regulations or rules can apply retroactively.

Penalties

The South African domestic transfer pricing legislation does not provide for any specific penalties or compliance incentives pertaining to the filing of transfer pricing documentation.

However, the general administrative penalties will apply for the late or non-filing of country-by-county reports (CbCR), master files and local files.

Administrative non-compliance penalties comprise fixed amount penalties as well as percentage-based penalties in accordance with Sections 210(1) and 211 of the TAA.

The penalty amount that will be charged depends on a taxpayer’s taxable income and can range from ZAR250 up to ZAR16 000 a month for each month that the non-compliance continues.

Where the application of non-arm’s length terms has resulted in any prejudice to SARS, the taxpayer may be liable for understatement penalties in terms of Section 222 of the TAA.

Understatement penalties are determined as a percentage of the difference between the understated amount of tax and the amount that should properly have been chargeable to tax. The percentage depends on the “behaviour” involved in the understatement and ranges between 10%, for a first case of “substantial understatement” to 200% for a repeat case of “intentional tax evasion”.

Transfer Pricing Documentation

South Africa has implemented the OECD’s “three-tiered” approach to transfer pricing documentation, consisting of a CbCR, a master file and local file.

• Regulation 1598 issued by the Minister of Finance provides regulations for purposes of paragraph (b) of the definition of “International Tax Standard” in Section 1 of the TAA, promulgated under Section 257 of the TAA, specifying the changes to the CbCR standard for multinational enterprises. These Regulations specify the changes to the CbC Reporting Standard for MNEs required for South Africa’s circumstances. The Regulations provide information with regards to which entities will have filing obligations, notification requirements, the specific information required to be included in the CbCR and timing of filing.
• In addition, Public Notice 1117 was issued in respect of returns to be submitted by persons in terms of Section 25 of the TAA. 

The Notice provides that a Reporting Entity, as defined in the CbC Regulations, will be required to submit information relating to all three tiers of documentation (ie, CbCR, master file and local file). In addition, a person whose aggregate potentially affected transactions (essentially cross-border transactions with a connected person) for the year of assessment exceed or are reasonably expected to exceed R100 million for the year of assessment, will be required to submit the information relating to the master file and local file.

• The necessary returns must be submitted within 12 months of the end of the taxpayer’s financial year.
• In addition to the submission of transfer pricing returns, SARS issued Public Notice 1334, in terms of Section 29 of the TAA, which provides for additional record keeping requirements specific to transfer pricing (“South Africa Record Keeping Requirements”). The South African Record Keeping Requirements provide for two levels of record keeping:
1. records in respect of structure and operations – a person is required to keep records where the person has entered into a “potentially affected transaction”, as defined, and the aggregate of the potentially affected transactions for the year of assessment exceeds or is reasonably expected to exceed R100 million; and
2. records in respect of transactions – a person who has entered into a “potentially affected transaction” must keep records in respect of any such transaction which exceeds or is reasonably expected to exceed R5 million in value.

South African taxpayers are required to compile a master file consistent with Annexure I to Chapter V of the OECD Transfer Pricing Guidelines, a local file consistent with Annexure II to Chapter V of the OECD Transfer Pricing Guidelines and CbCR consistent with Annexure III to Chapter V of the OECD Transfer Pricing Guidelines.

South Africa follows the OECD Transfer Pricing Guidelines.

South Africa follows the OECD Transfer Pricing Guidelines.

South Africa is a member of the G20, the OECD/G20’s BEPS Project and the OECD’s Inclusive Framework, in addition to its OECD Committee on Fiscal Affairs observer status since 2004.

South Africa has been amongst the first adopters of BEPS Actions in general.

SARS has consistently endorsed the OECD Transfer Pricing Guidelines in its policies, and legislative amendments to the South African ITA have been made to reflect certain guidance contained in the OECD Transfer Pricing Guidelines.

Notably, South Africa:

• was amongst the first batch of signatories to the Multilateral Instrument (MLI) in June 2017 (South Africa ratified the MLI in 2022);
• enacted (in 2016 and 2017) domestic regulations to enact transfer pricing documentation requirements aligned with Chapter V of the OECD’s 2017 Transfer Pricing Guidelines (also referred to as BEPS Action 13), including the exchange of CbCR; and
• committed to implementing BEPS Action 14, Making Dispute Resolution Mechanisms More Effective.

The Minister of Finance in his 2022/2023 Budget Speech presented to Parliament on 23 February 2022 announced that South Africa will introduce legislative amendments to implement the two-pillar solution once the framework is translated into local context.

South Africa will be implementing the Pillar Two Global Minimum Tax Rules, including an Income Inclusion Rule (IIR) and Domestic Minimum Top-Up Tax (DMTT). Subject to approval, the legislation for the new rules will be deemed to have come into operation on 1 January 2024 and will apply to fiscal years commencing on or after that date.

South Africa does not permit one entity in South Africa to bear the risk of another resident entity’s operations.

In South Africa, while the UN Practical Manual on Transfer Pricing is taken into consideration, it does not have a direct impact on transfer pricing practice or enforcement.

South Africa does not have specific transfer pricing safe harbours outlined in its legislation.

South Africa does not have any rules governing savings that arise from operating in South Africa.

South Africa does not have any unique rules or practices applicable in the transfer pricing context.

There is co-ordination between transfer pricing and customs valuation from a South African perspective, notably as follows.

Value Declared to SARS at the Time of Importation

The Customs and Excise Act, 1964 (the “Customs Act”) provides that the transaction value (price paid or payable for goods when such goods are sold for export to South Africa) between related parties will only be accepted for customs valuation purposes where the importer can demonstrate that:

• the relationship between the related parties did not influence the price paid or payable for the goods; or
• the transaction value closely approximates to one of the following test values:
1. the transaction value of identical or similar goods sold at comparable trade and quantity levels to unrelated buyers in South Africa at or about the same time as the goods to be valued;
2. the unit price at which the imported goods or identical or similar imported goods are sold (by the importers thereof to persons not related to them) in South Africa in the greatest aggregate quantity, at or about the time of importation of the goods to be valued; or
3. a computed value, computed by means of specific information supplied by the producer of the goods.

Transfer pricing documents are an integral part of assessing whether the transaction values declared by the importer to SARS:

• are acceptable as values that closely approximate to one of the test values; or
• have been influenced by the relationship between the related parties.

Transfer Pricing Adjustments

The Customs Act provides that the importer must notify SARS Customs of any credit note, debit note or amended invoice, issued after importation of the goods, which adjusts the original invoice declared to SARS for purposes of importing the goods. The notification to SARS must detail the circumstances of the credit note, debit note or amended invoice and must be made within one month of the importer’s receipt of the credit note, debit note or amended invoice.

Draft amendments of the rules to the Customs Act have recently been published which provide for the manner in which bills of entry may be adjusted where the customs value declared to SARS is affected by transfer pricing adjustments. The amended rules set out in detail the information and documentation that must accompany the notification letter to SARS which include, inter alia:

• the invoice, debit or credit note;
• transfer pricing policy;
• the adjustment factor used to determine the adjustment to the value as reflected in the transfer pricing policy; and
• the effect of the changes indicated on the customs duty and VAT in respect of the relevant bill of entry.

If the transfer pricing adjustment results in an increase to the declared customs value, the importer will be liable for the payment of any underpaid duties and value-added tax, as a result thereof.

If the transfer pricing adjustment results in a decrease to the declared customs value, the importer may submit vouchers of correction to SARS and a refund claim for any overpaid duties.

South Africa does not have a controversy process specifically for transfer pricing matters and the general tax controversy process is applied.

Once an audit has been completed, the taxpayer is entitled to object to an additional assessment raised by SARS and follow the normal process to resolve the dispute.

The legal foundation for these disputes, relating to all tax types administered by SARS except for the customs and excise Acts, is outlined in Chapter 9 of the TAA, along with the regulations established under Section 103 of the South African ITA.

Alternative dispute resolution procedures may also be followed at the election of the parties in order to resolve a TP dispute.

Under the “pay now argue later” rule, taxpayers are required to pay amounts owing to SARS, despite disputing the amount so owing. Such obligation is not suspended when an objection has been lodged.

Tax matters are addressed through the tax court, a specialised court dedicated to resolving tax disputes. The tax court possesses exclusive jurisdiction over tax matters and procedural issues related to tax matters.

Provision is made for appeals to higher courts under the required circumstances.

The jurisprudence concerning transfer pricing is not extensively developed in South Africa and to date there has been only one transfer pricing case heard by the courts.

Aside from a case primarily addressing procedural aspects related to a transfer pricing dispute, there is only one case dedicated to transfer pricing.

In IT 14302 the case involved the determination of the value of a right in respect of intellectual property, and the calculation of royalties based on the value of such right, and the different methodologies used in these calculations, which yielded widely different outcomes.

During 2011, the taxpayer obtained advice on the royalty rate to be charged to its various operating companies, which resulted in a 1% royalty rate. SARS issued additional assessments to the South African resident company taxpayer during 2014 for the taxpayer’s 2009 tax year under Section 31(2) of the ITA and contended that the transactions between the South African taxpayer and its operating companies did not meet the arm’s length standard to the extent that a royalty of 1% is not an arm’s length royalty and that a variable rate should have applied depending on the country and the year it was earned.

The court was tasked with determining the arm’s length price of the royalty (taking into account its rationale for trade consequences and fairness) and the various methodologies that could be used to calculate the arm’s length price.

The court found that where it is possible to locate a comparable cup, the OECD Transfer Pricing Guidelines provide that an internal CUP is the preferred method for determining the arm’s length price and in the circumstances, there was a comparable internal CUP which reflected a royalty rate of 1%.

The taxpayer’s appeal for years 2009 to 2012 was upheld and SARS’ additional assessments set aside.

The case underscores the importance of adhering to the arm’s length standard in determining royalty rates for intellectual property transactions. It highlights the necessity of considering various methodologies for calculating arm’s length prices and the relevance of the OECD Transfer Pricing Guidelines in this context. It emphasises the preference for the CUP method when comparable information is available and the use of the most appropriate transfer pricing method.

In respect of externalising funds in relation to uncontrolled transactions, South Africa has country-specific exchange controls which could significantly complicate or delay cross-border cash flows.

Exchange control rules, generally administered by South Africa’s central bank (Reserve Bank), are aimed at regulating inward and outward capital flows. Sometimes exchange control rules may prohibit certain categories of cross-border cash flows unless prior approval has been obtained.

Obtaining exchange control approvals can be a time-consuming and administratively burdensome process. In many instances, cross-border cash flows can practically be implemented, completely or partially without prior approval. However, prior approval may be required to declare dividends, settle foreign loans or interest payments, pay royalties and service fees, etc. Specific terms and conditions may apply to payments as advised by an Authorised Dealer or the Reserve Bank.

In South Africa, the Reserve Bank is responsible for reviewing and approving cross-border payments to connected parties in controlled transactions. Such approval is required in order to externalise funds.

South Africa does not have any rules regarding the effects of other countries’ legal restrictions contained in its domestic legislation.

The general rule is that every person employed by SARS in carrying out the provisions of the South African ITA must preserve the secrecy of matters that may come to that person’s knowledge in the performance of that person’s duties. Such persons are not entitled to communicate any such matter to any person who is not a SARS official.

There are specific exceptions to this rule but it is uncertain whether exceptions will be made for the publication of information on APAs.

Details concerning the outcomes of transfer pricing audits should remain confidential owing to the secrecy provisions or owing to settlement or other agreements with SARS.

South Africa does not explicitly prohibit the use of “secret comparables” in transfer pricing documentation. However, the use of undisclosed or “secret comparables” could give rise to concerns regarding the transparency and accuracy of transfer pricing analyses which rely on such comparables.

In PN7, SARS recognises that it may have access to information which is not publicly available. It admits that the secrecy provisions under the tax legislation may prevent such information from being used as evidence in a court of law. Nevertheless, SARS could utilise such information for other purposes in performing its mandate.