Should this proposal be promulgated, Multi-National Enterprises 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 for 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 Income Tax Act, 58 of 1962 (“the Act”).
Safety Without 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 states of the Organisation for Economic Co-operation and Development, 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.
National Treasury’s Position
As there are no “safe harbours” that apply in South African law to exempt a taxpayer’s compliance obligations under section 31 the Act. Therefore, each related party cross-border transaction must be assessed independently, taking into account all relevant factors, to determine if it is conducted on an arm’s length basis. This usually independent benchmarked evidence to support the transaction. In this regard, Treasury has confirmed in their response documents, that where consensus is not reached on an APA, affected parties are free to continue on the basis initially proposed.
The Memorandum on the Objects of the Tax Administration Laws Amendment Bill, 2023, notes that the implementation of an APA programme will provide certainty for large-scale international transactions. This will allow taxpayers to ensure adherence to their transfer pricing obligations from the get-go and aligns well with SARS’ strategic intent of “providing clarity and certainty to taxpayers to promote voluntary compliance”.
The APA process commences with a prescribed person submitting a “pre-application consultation” to SARS for a pre-application consultation meeting to put in shape the application process. After consulting with the other country’s “competent authority”, SARS will then notify the prospective applicant within 90 days if they can submit an “advance pricing agreement application”.
Upon the said application, SARS will then engage with the “competent authority” of the jurisdiction in which the other party to the “affected transaction” is resident. 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 APA will then remain in effect in principle for a period not exceeding 5 years.
Considerations in relation to the/any APA Programme
The implementation of the APA programme would serve well to align with other OECD member states, as well as non-OECD countries such as Singapore and Egypt. Among the BRICS nations, Russia, China, and India have all successfully implemented APA legislation; South Africa would be following international trends across the board.
Practically, this means that SARS must build its transfer pricing capacity as a starting point. In their responses to public comment, SARS and Treasury have confirmed this will be done by SARS drawing on experience from both the advanced tax ruling system and voluntary disclosure programme. For now, the authorities have noted that due to the skills shortage on transfer pricing, they may need to draw on expertise across the organisation.
In this process, the best practice is to enact legislation to support the proposed APA system by the National Treasury. The APA system should then be applicable to affected transactions which meet the specified criteria.
With the certainty the APA programme will 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.