The Tax Administration Laws Amendment Act, 2023, inserted Part IA into Chapter III of the Income Tax Act, 1962 (“the Act”), thereby introducing the framework for the advance pricing agreement (“APA”) programme.
Jashwin Baijoo
Partner and Head of Strategic Engagement & Compliance
As explained by the South African Revenue Service (SARS) and National Treasury, the aim of implementing APAs is not only to keep up with international trends, but also to “provide taxpayers with a greater level of certainty when embarking on large-scale international transactions that have transfer pricing implications.”
The Organisation for Economic Co-operation and Development (OECD) promotes APAs as a key mechanism in enhancing tax certainty and preventing transfer pricing disputes between Multinational Enterprises (MNEs) and tax administrations.
From a global business expansion perspective, MNEs will be the most affected, as South Africa’s current transfer pricing framework is informed by the “arm’s length principle” which serves as the accepted standard for any related party transaction.
This principle outlines South Africa’s position on transfer pricing in general and plays a crucial role in determining a taxpayer’s position within the context of the transfer pricing provisions under section 31 of the Act.
APA Programme for Public Comment
As noted in the Explanatory Note, the APA Programme will require scarce resources, therefore it is envisaged the programme will commence with a pilot phase, initially accepting only bilateral APA applications.
With the initial resources needed for the APA programme now in place, the subordinate legislation has been released for public comment, with comments due by close of business on 29 May 2026.
In summary, the APA process commences with an eligible person, being either party to, or contemplating entering into, an “affected transaction” submitting a “pre-application consultation” to SARS, and paying the proposed concomitant consultation fee of R100,000, within seven days of the date of the invoice being issued.
Where SARS has then notified the prospective applicant that they may apply for a Double-Tax Agreement APA, a cost-recovery fee of R1,000,000 must be paid toward the processing of such application, in two separate payments, being a R200,000 deposit and R800,000 at 90-day intervals, comprising eight equal instalments.
SARS will then engage with the “competent authority” of the jurisdiction in which the other party to the “affected transaction” is resident, to develop a DTA APA project plan, including the stages of processing and key milestones.
If the two authorities reach an agreement on the most acceptable pricing methodology for the transaction, ensuring that it meets the arm’s length standard for pricing, the APA becomes valid once signed by all required parties.
The suite of draft subordinate legislative instruments for public comment, also include notices prescribing, among others, the persons eligible to apply for a bilateral APA under a double taxation agreement (“DTA”), the additional grounds upon which an application may be rejected, the procedural and processing requirements applicable to APA applications, the information required in a preliminary APA application, as well as the procedures and guidelines governing the implementation and operation of the DTA APA system.
APAs – Safety Where There are No Safe Harbours
At a high-level, the arm’s length principle is the international standard by which all commercial or financial dealings between two connected enterprises must be conducted. This principle notes that the terms of such transactions should closely resemble those that would have been agreed upon had the contracting parties been independent enterprises. Tax implications must also follow the same principle and accrue as though the enterprises were not connected. This standard is adopted by all members to the OECD Model Tax Convention, as well as other non-member states.
In practice, the responsibility lies with the taxpayer to demonstrate that the relevant cross-border related party transaction adheres to the arm’s length principle and provide supporting documentation as evidence. Simply relying on a safe harbour provision does not automatically relieve the taxpayer of this obligation.
As there are no “safe harbours” that apply in South African law to exempt a taxpayer’s compliance obligations under section 31 the Act, the introduction of the APA programme is of pivotal importance to align with global tax standards.
Closing Considerations
The pilot of the APA programme serves well to align with other OECD member states, as well as non-OECD countries such as Singapore and Egypt. Among the BRICS nations, China and India have both successfully implemented APA legislation. South Africa now follows international trends across the board.
Practically, this means that SARS must address the scarce resource dilemma to bolster its transfer pricing capacity, allowing a full rollout subsequent to the conclusion of the pilot.
The insertion of APA rules in our legislative framework is a step in the right direction and may be what South Africa needs to increase international business opportunities. With the certainty the APA programme shall provide, to both contracting parties, and their respective states, it may serve to boost Foreign Direct Investment into an economy in need, furthering development of infrastructure.
