Transfer Pricing South Africa

Transfer Pricing authority and tax law

Section 31 of the Income Tax Act 58 of 1962 (the Act) contains the main legislative provisions concerning transfer pricing. Section 31 authorizes the Commissioner of the South African Revenue Services (SARS) to adjust the consideration for goods or services to what he regards as an arm’s length price for the purposes of computing the South African taxable income of a person.

ransfer Pricing regulations and rulings

There are no specific regulations or rulings; however, guidance for the application of § 31 is contained in Practice Notes Number 2 (14 May 1996) and 7 (6 August 1999).

OECD guidelines of Transfer Pricing

Although South Africa is not a member of the OECD, the South African tax authority accepts the OECD guidelines and has largely based Practice Note 7 on these Guidelines. By the same token, the South African tax authority recognizes the five methods accepted by the OECD.

Transfer Pricing methods

The SARS accepts the methods prescribed by the OECD, i.e., CUP, RPM, Cost Plus, TNMM and Profit Split. The SARS prefers transaction- based methods over profit-based methods, but the TNMM is most commonly applied by taxpayers and general y accepted, provided the taxpayer can show that reliable data was not available to apply CUP, RPM or Cost Plus. Reasons for discounting other methods must be given, and as such, the SARS does, in practice, apply a hierarchy of methods. The SARS may require that adjustments be made on foreign comparable company results used in benchmarking the results of the South African entity, to compensate for differences in risks assumed by entities operating in a different jurisdiction.

Penalties in Transfer Pricing

Any adjustments made by the SARS under § 31 are deemed to be dividends, and the Secondary Tax on Companies (STC) at a rate of 12.5% (10% with effect from 1 October 2004) will be levied. There are no other specific penalties for transfer pricing, but general penalty rules are applicable, which could reach 200% of the additional tax resulting from an adjustment (where no or inadequate disclosure was provided).

Penalty relief in Transfer Pricing

Where taxpayers have made conscientious efforts to establish transfer prices that comply with the arm’s length principle, and have prepared documentation to evidence such compliance, the SARS is likely to take the view that the taxpayer’s transfer pricing practices represent a lower tax risk. Accordingly, the preparation of sound and consistent transfer pricing practices may reduce the possibility of an audit and, therefore, reduce the likelihood of incurring penalties.

Transfer Pricing Documentation requirements

The taxpayer has the burden of proof that its prices are arm’s length. The best way to discharge the burden of proof is by developing a transfer pricing policy, determining the arm’s length amount and voluntarily producing documentation to evidence the analysis undertaken. Having said this, the SARS would expect taxpayers to have created, referred to and retained transfer pricing documentation in accordance with prudent business management principles, i.e., the principles that would govern the process of evaluating a business decision at a similar level of complexity and importance.

There is no specific statutory requirement to prepare transfer pricing documentation. However, a company that has such documentation is required to submit it together with its tax return.

Documentation deadlines for Transfer Pricing

Transfer pricing documentation should be prepared not later than the date of submission of a tax return affected by the intercompany transactions. Tax returns are due eight months after a company’s financial year-end, and provided all tax affairs are up to date, the company can obtain a further extension of up to 12 months.

Statute of limitations of transfer pricing assessments

The statute of limitations is three years from the date of assessment. There is no limitation on the examination of a tax return if an amount was not assessed due to fraud, misrepresentation or non-disclosure of material facts.

Return disclosures/related-party disclosures

The company has to answer a number of questions and provide further details specifically related to its transfer pricing policies and documentation in its annual tax return.

Transfer Pricing Audit risk/transfer pricing scrutiny

The risk of transfer pricing issues being reviewed under an audit is high, as transfer pricing remains an area of focus for the SARS. The SARS communicates on a regular and ongoing basis with other revenue authorities, particularly the United Kingdom’s HMRC.

Advance Pricing Agreements of tansfer pricing

APAs are not available.