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
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
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.