South Africa’s transfer pricing laws are aligned with the Guidelines set by the Organization for Economic Co-operation and Development (OECD) and incorporated within Section 31 of the Income Tax Act.
Arm’s Length Principle
South Africa’s transfer pricing (TP) rules are based on the OECD Guidelines and they provide guidance on determining an arm’s length price for cross-border related party transactions. This means that South African taxpayers need to make sure cross transactions with overseas related ones behave as they would with independent parties when conducting deals. If a transaction leads to a tax benefit due to non-arm’s length terms, the taxable income must be recalculated using prices that would apply between unrelated parties. Any difference may be treated as a deemed dividend (for companies) or a donation (for individuals), potentially triggering additional tax consequences.
Related Party Definition
South African Income Tax Act also defines a “connected person” as including entities, trusts, partnerships, and companies. These include relatives, trusts where a person or his relative is a beneficiary, and persons or entities having dominant control or ownership—ordinarily 20% or more—of the shares of or voting powers in another company. Companies are also considered connected if controlled or managed by the same entity or group or with substantial common ownership connections.
For South African transfer pricing rules, this definition has been extended. From 1 January 2022, the rules also apply to “associated enterprises” as defined in Article 9 of the OECD Model Tax Convention. This means that more business relationships are now brought within South Africa’s transfer pricing law.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in South Africa are:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Profit Split Method
South Africa follows the methods recommended in the OECD Transfer Pricing Guidelines but does not specifically mention them in its domestic laws. When selecting the method, the South African legislature requires the hierarchy of approaches used by the OECD to be applied in determining the arm’s length price for a particular transaction.
Comparability Analysis
South Africa follows the OECD Transfer Pricing Guidelines for comparability analysis but does not have specific domestic laws on the topic. There is no preference for domestic or foreign comparables, and both can be used. Secret comparables are not used for tax assessments. The use of an arm’s length range is not specifically required by law, but the OECD guidelines are followed. Comparability adjustments are not mandatory, but the OECD guidelines provide guidance.
Documentation Requirements
Transfer pricing documentation requirements in South Africa are based on the three-tiered approach set forth by the OECD. This requires multinational groups to submit the following documentation to the South African tax authority:
- Master File;
- Local File, and
- Country-by-Country (CbC) report
Master and Local File
South African companies involved in certain transactions must submit master and local files if the total value of those transactions is greater than or expected to exceed 100 million rand.
The Master File is required if the ultimate holding company is in South Africa or if no other entity within the group has prepared one. It provides high-level information about the multinational enterprise’s (MNE) global business operations and transfer pricing policies. This includes details on the organizational structure, business description, intangibles, intercompany financial transactions, and financial and tax positions.
The Local File contains detailed information on specific intercompany transactions involving a South African affiliate. It includes the local entity’s management structure, business strategy, key competitors, controlled transactions, and financial information. The Local File primarily focuses on transfer pricing compliance from South Africa’s perspective.
Country-by-Country Reporting
A CbC (Country-by-Country) report must be filed if a multinational group has annual consolidated revenue of at least 10 billion rands or 750 million euros in the previous fiscal year. A South African entity must file the report if the group’s ultimate parent is not required to file one, if its country lacks an agreement with South Africa, or if there is a systemic failure in its jurisdiction. If multiple South African entities belong to the same group, one can be designated to file the report. The report, due within 12 months after the fiscal year ends, must include financial data and details on each group entity.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Advance Pricing Agreements (APA): No advance pricing agreement regulations have been passed by South Africa. The Income Tax Act is expected to be amended to allow for unilateral agreements between an applicant and the South African Revenue Service (SARS) on its own, or an agreement between an applicant and the SARS with the approval of another competent authority (a “DTA agreement” in the legislation). The maximum term for an accepted APA shall be five years.
Mutual Agreement Program (MAP): The Mutual Agreement Procedure (MAP) in South Africa is a dispute resolution mechanism that allows taxpayers to resolve international tax disputes arising from double taxation or inconsistent tax treatment between countries. The process involves competent authorities from the respective countries negotiating to eliminate double taxation and ensure fair tax treatment. Taxpayers seeking MAP relief must file a request with the South Africa Revenue Service, providing details of the dispute and relevant documentation.
Approach to Transfer Pricing Audits
South Africa Revenue Service has been focusing on transfer pricing (TP) in recent years. There is a medium chance of a general annual tax audit, but the likelihood of TP being included in that audit is high. TP methodology is reviewed on a case-by-case basis, but it is often questioned during the audit. If SARS challenges the methodology, an adjustment is likely.
Penalties
South Africa does not have specific penalties or rewards for filing transfer pricing documentation. However, general penalties apply if CbC reports, Master files or Local files are filed late or not filed at all. Exemptions include:
- CbC reporting is required if the group’s revenue is over R10 billion or EUR 750 million.
- A local file must be filed if a person’s transactions potentially affected by transfer pricing exceed R100 million, and they are a tax resident.
Taxation at a Glance
South Africa’s tax system is based on the Income Tax Act of 1962 and other tax laws. Both individuals and businesses pay taxes, but the rates and rules depend on the industry. The system includes different types of taxes, such as income tax, estate duty, securities transfer tax, and mineral royalties. In South Africa, the currency is the South African Rand (ZAR)
The official name of the South Africa tax authority is the South Africa Revenue Service.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 28% |
VAT | 15% |
Withholding tax on dividends to non-residents | 20% |
Withholding tax on interest to non-residents | 15% |
Withholding tax on royalties to non-residents | 15% |
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