South AfricaSouth Africa

Legal ReferenceSection 31 of the Income Tax Act, Act No. 58 of 1962 (“SA Income Tax Act”)

Legal ReferencePractice Notes / Interpretation Notes Practice Note 7 must be read with the following: The record requirements of this Practice Note (including the addendum) will now be replaced by the record requirements of Notice 1334 of Government Gazette 40375 dated 28 October 2016 to the extent applicable (as mentioned in the Briefing Note)

Practice Note 7 issued by SARS gives subsidiary application status to section 31 of the Income Tax Act no.28 of 1962. The OECD Transfer Pricing Guidelines provide supporting guidance for the application of the arm’s length principle contained in the South African domestic transfer pricing legislation. Paragraph 3.1 of Practice Note 7 provides that “…This practice note has been drafted as a practical guide and is not intended to be prescriptive or an exhaustive discussion of every transfer pricing issue that might arise…” Paragraph 3.2 of Practice Note 7 provides that “…Because of the international importance of the OECD Guidelines, this Practice Note is based on, inter alia, those guidelines…

Legal ReferenceSection 1 of the SA Income Tax Act Interpretation Note 67 Interpretation Note 128

Section 1 of the SA Income Tax provides for a definition of “connected person”. It is a general definition that encapsulates natural persons, trusts, partnerships and companies. For the purposes of the South African domestic transfer pricing legislation, the general definition of ‘connected person’ has been widened. Effective for years of assessment commencing on or after 1 January 2022, the South African domestic transfer pricing legislation is also applicable to “associated enterprises” as defined in Article 9 of the OECD Model Tax Convention, in relation to one another.

Legal ReferencePractice Notes / Interpretation Notes Practice Note 7 must be read with the following: The record requirements of this Practice Note (including the addendum) will now be replaced by the record requirements of Notice 1334 of Government Gazette 40375 dated 28 October 2016 to the extent applicable (as mentioned in the Briefing Note) Interpretation Note 127

South Africa relies on the methods in the OECD Transfer Pricing Guidelines without having any direct reference to any method in its Transfer Pricing domestic legislation. This is reflected in Practice Note No. 7 and Interpretation Note No. 127.

• CUP (provided)
• Resale Price (provided)
• Cost Plus (provided)
• TNMM (provided)
• Profit Split (provided)
• Other (not provided)

Legal ReferencePractice Notes / Interpretation Notes Practice Note 7 must be read with the following: The record requirements of this Practice Note (including the addendum) will now be replaced by the record requirements of Notice 1334 of Government Gazette 40375 dated 28 October 2016 to the extent applicable (as mentioned in the Briefing Note) Interpretation Note 127

South Africa relies on the guidance in the OECD Transfer Pricing Guidelines on the selection of the applicable transfer pricing method using the most appropriate method as a criterion. Neither Section 31 nor the tax treaties entered into by South Africa prescribe any particular methodology for the purpose of ascertaining an arm’s length consideration. Given that there is no prescribed legislative preference, the Commissioner would generally seek the most appropriate method. The most appropriate method in a given case will depend on the facts and circumstances of the case and the extent and reliability of data on which to base a comparability analysis. It should always be the intention to select the method that produces the highest degree of comparability. The Commissioner endorses the CUP, RP, CP, TNMM and profit split methods as acceptable transfer pricing methods, the most appropriate of these depending on the particular situation and the extent of reliable data to enable its proper application.

• Hierarchy of methods (not selected)
• Most appropriate method (selected)

The South African domestic transfer pricing legislation does not contain specific legislation or guidelines for the treatment of commodity transactions. The practice is that the OECD Transfer Pricing Guidelines are consulted for purposes of considering and selecting the most appropriate transfer pricing method.

South Africa follows the guidance on comparability analysis as outlined in Chapter III of the OECD Transfer Pricing Guidelines.

The South African domestic transfer pricing legislation does not contain specific legislation or guidelines for the selection and or use of domestic or foreign comparables. However, the OECD Transfer Pricing Guidelines are consulted to provide guidance on comparability analysis.

The South African domestic transfer pricing legislation does not contain specific legislation or guidelines to permit the use of secret comparables for transfer pricing comparability assessment purposes.

Legal ReferencePractice Notes / Interpretation Notes Practice Note 7 must be read with the following: The record requirements of this Practice Note (including the addendum) will now be replaced by the record requirements of Notice 1334 of Government Gazette 40375 dated 28 October 2016 to the extent applicable (as mentioned in the Briefing Note)

The South African domestic transfer pricing legislation does not contain a specific provision that allows or requires the use of an arm’s length range and/or statistical measure for determining the arm’s length range. However, South Africa follows the OECD Transfer Pricing Guidelines, which provide in-depth guidance on the use of an arm’s length range and/or statistical measure for determining arm’s length remuneration. This is reflected in Practice Note No. 7 at a high level. Paragraph 11.4.7 of Practice Note.7 provides that “…The Commissioner concurs with the view of the OECD that the adjustment should reflect the point in the range that best accounts for the facts and circumstances of the controlled transaction. However, in the absence of persuasive evidence for the selection of a particular point in the range, the Commissioner may select the mid-point in the range…”

The South African domestic transfer pricing legislation does not contain a specific provision or inclusion for comparability adjustments. However, the OECD Transfer Pricing Guidelines are consulted to provide guidance on comparability adjustments.

Legal ReferencePractice Notes – South African Revenue Service (sars.gov.za) Practice Note 7 must be read with the following: The record requirements of this Practice Note (including the addendum) will now be replaced by the record requirements of Notice 1334 of Government Gazette 40375 dated 28 October 2016 to the extend applicable (as mentioned in the Briefing Note)

The South African domestic transfer pricing legislation does not contain a specific provision or inclusion on the pricing of transactions involving intangibles. South Africa follows the OECD Transfer Pricing Guidelines, which provide in-depth guidance on pricing of controlled transactions involving intangibles. Transactions involving intangibles is also reflected in SARS Practice Note No. 7, at a high level.

Legal ReferenceSection 23I of the SA Income Tax Act Prohibition of deductions in respect of certain intellectual property

South Africa follows the OECD Transfer Pricing Guidelines, in this respect. Whilst not specifically focused on the pricing of controlled transactions involving intangibles, South Africa has legislated a number of anti-avoidance provisions relating to intangibles: Section 23I is the South African domestic provision that prohibits a deduction in respect of certain intellectual property. The purpose of the provision is to, in specified circumstances, disallow the deduction in the hands of a South African resident who licenses IP from a non-taxable person, including a non-resident. The following is a summary of the licensing transactions to which the provision applies: Exportation of IP; Bare dominium structures; Sale of business as a going concern; Research and Development (R&D) structure; Controlled Foreign Companies (CFCs); Synthetic arrangements.

Legal ReferenceHTVI Implementation Questionnaire

To date, South Africa has not adopted the HTVI approach, as defined in Chapter VI of the OECD Transfer Pricing Guidelines.

Legal ReferencePractice Notes – South African Revenue Service (sars.gov.za) Practice Note 7 must be read with the following: The record requirements of this Practice Note (including the addendum) will now be replaced by the record requirements of Notice 1334 of Government Gazette 40375 dated 28 October 2016 to the extend applicable (as mentioned in the Briefing Note)

The South African domestic transfer pricing legislation does not contain a specific provision or inclusion on intra-group service transactions. However, Practice Note No. 7 states that Chapter VII of the OECD Transfer Pricing Guidelines is relevant and therefore the OECD Transfer Pricing Guidelines are followed.

South Africa has not adopted the simplified approach for low value-adding intra-group services.

Legal ReferenceSection 11(a) of the SA Income Tax Act - General deductions allowed in determination of taxable income Sections 80A – 80L of the SA Income Tax Act - General Anti Avoidance Rules (“GAAR”)

South Africa follows the OECD Transfer Pricing Guidelines in this respect. Whilst not specifically focused on the pricing of intragroup services, South African tax legislation contains a number of other provisions: the following general sections 11(a) (general deduction of expenses provision) and 80A – 80L (general anti-avoidance provision) of the SA Income Tax Act may be applied.

Legal ReferenceInterpretation Note 127

The South African domestic transfer pricing legislation does not contain a specific provision or inclusion on financial transactions. However, South Africa follows the OECD Transfer Pricing Guidelines, which provides in-depth guidance on financial transactions. Interpretation Note No.127 was issued by SARS, on 17 January 2023 which provides guidance relating to the determination of taxable income of certain persons from international transactions: intragroup loans.

Legal ReferenceSection 23M of the SA Income Tax Act - Limitation of interest deductions in respect of debts owed to persons not subject to tax Section 23N of the SA Income Tax Act - Limitation of interest deductions in respect of reorganisations and acquisition transactions Section 50B of the SA Income Tax Act - levy of withholding tax on interest Section 24J of the SA Income Tax Act - Incurral and accrual of Interest Section 24JA of the SA Income Tax Act - Sharia compliant financing arrangements Section 24JB of the SA Income Tax Act - Taxation in respect of financial assets and liabilities of certain persons Section 24K of the SA Income Tax Act - Incurral and accrual of amounts in respect of interest rate agreements . Section 24L of the SA Income Tax Act - Incurral and accrual of amounts in respect of option contracts Section 24O of the SA Income Tax Act - Incurral of interest in certain debts deemed to be in the production of income National Treasury Discussion Paper on Reviewing the Tax Treatment of Excessive Debt Financing, Interest Deductions and Other Financial Payments dated 26 February 2020

Whilst the OECD Transfer Pricing Guidelines provide the primary framework for the tax treatment of financial transactions between related parties, there are additional relevant sections under the South African Income Tax Act that, whilst not directly related to transfer pricing may still affect the overall tax treatment of these transactions. The South African Income Tax Act contains various sections that consider the limitation and computation of interest deductions for income tax purposes (not necessarily specific for transfer pricing). A discussion paper was published in February 2020. This paper explores the Treatment of Excessive Debt Financing, Interest Deductions and Other Financial Payments, based on the measures contained in BEPS Action 4.

Legal ReferencePractice Notes – South African Revenue Service (sars.gov.za) Practice Note 7 must be read together with the following: The record requirements of this Practice Note (including the addendum) will now be replaced by the record requirements of Notice 1334 of Government Gazette 40375 dated 28 October 2016 to the extend applicable (as mentioned in the Briefing Note)

The South African domestic transfer pricing legislation does not contain a specific provision or inclusion on cost contribution agreements. South Africa follows the OECD Transfer Pricing Guidelines, which provides guidance on this topic. This is reflected in Practice Note No. 7

Legal ReferenceDuty to keep records, books of account or documents in terms of Section 29 of the Tax Administration Act, 2011 Return to be submitted by persons in terms of Section 25 of the Tax Administration Act, 2011 Extension of deadline to file country by country returns in terms of section 25(7) of the Tax Administration Act, 2021

The income tax return for companies (ITR14) contains a detailed section that the taxpayer must complete in relation to its cross-border transactions entered into with its connected persons.

• Master file consistent with Annex I to Chapter V of the TPG (selected)
• Local file consistent with Annex II to Chapter V of the TPG (selected)
• Country-by-country report consistent with Annex III to Chapter V of the TPG (selected)
• Specific transfer pricing returns (separate or annexed to the tax return) (not selected)
• Other (specify): IT14 (selected)

Legal ReferenceDuty to keep records, books of account or documents in terms of Section 29 of the Tax Administration Act, 2011 Return to be submitted by persons in terms of Section 25 of the Tax Administration Act, 2011 Extension of deadline to file country by country returns in terms of section 25(7) of the Tax Administration Act, 2021

For tax return filing purposes taxpayers are asked questions on the returns, for example, pertaining to whether the taxpayer has entered into intra-group transactions with offshore connected parties and if the taxpayer has supporting documentation to support the arm’s length nature of such transactions. In addition to the above, taxpayers who meet the criteria of the sections and/or provisions set out below are mandated to: (i) keep or retain certain transfer pricing related documents in terms of Section 29 of the Tax Administration Act, 2011; and (ii) file a Country-by-Country Report; a Master File, and/or a Local File within a year of the end of their financial year in terms of Section 25 of the Tax Administration Act, 2011. All of the above must be completed in English. The relevant filing or retention dates are provided for in each of the relevant notices (see links provided).

Legal ReferenceIncidences of non-compliance by a person in terms of Section 210(2) of the Tax Administration Act, 2011 that are subject to a fixed penalty in accordance with sections 2010(1) and 211 of the Tax Administration Act, 2011

The South African domestic transfer pricing legislation does not provide for any specific penalties or compliance incentives pertaining to the filing of transfer pricing documentation. General administrative penalties apply for the late or non-filing of CbC reports, Master files and Local files.

Legal ReferenceSection 29 of the Tax Administration Act, 2011

Where a CbC report is required to be filed, a CbC report, master file and local file must be filed by the Ultimate Parent Entity or the Constituent Entity. The threshold for CbC reporting is consolidated group revenue of R 10billion or EUR 750million. In addition, where the aggregate of a person’s potentially affected transactions (i.e. transactions potentially subject to transfer pricing adjustments) for the year of assessment, without offsetting any potentially affected transactions against one another, exceeds or is reasonably expected to exceed R100 million, and that person is a tax resident, the person must submit a local file. If the ultimate holding company of the person’s group is resident in South Africa or a master file has been prepared by any entity within the group, the person must also submit a master file.

Legal ReferenceSouth Africa’s MAP Profile Section 76A of the Income Tax Act, No 58 of 1962.

APAs: South Africa has introduced APA legislation in terms of Section 76A of the Income Tax Act, No. 58 of 1962. The application of the legislation is subject to Commissioner’s Notices that guide the application of the APA. The Commissioner’s Notices to effect the legislation are yet to be released. Information relating to MAP regulations, procedures or guidance is contained in the South Africa’s MAP Profile.

• Rulings (not selected)
• Enhanced engagement or cooperative compliance programmes (selected)
• Advance Pricing Agreements (APA) (not selected)
• International Compliance Assurance Programme (ICAP) (not selected)
• Mutual Agreement Procedures (selected)

South Africa whilst having expressed an interest in applying Amount B: The Simplified and Streamline Approach for Baseline Marketing and Distribution Activities, has not yet legislated it.

• 20% (not selected)
• 30% (not selected)
• Other (please specify) (not selected)
• N/A (selected)

In the absence of a MAP, there cannot be a downward corresponding adjustment. The legislation cannot be applied in the absence of proving that there has been a “tax benefit” which is a requirement of section 31 – therefore section 31 of the SA Income Tax Act does not include a provision to allow for a downward corresponding adjustments.

Legal ReferenceSection 31 of the SA Income Tax Act

Although there are no specific provisions included in South Africa’s transfer pricing legislation dealing with year-end adjustments, year-end adjustments would generally be considered and evaluated based on the arm’s length principle as provided for by Section 31 of the SA Income Tax Act

Legal ReferenceSection 31(3) of the SA Income Tax Act

Section 31(3) of the SA Income Tax Act provides that the difference in taxable income on an arm’s length basis and taxable income on a non-arm’s length basis is deemed to be a dividend consisting of a distribution of an asset in specie declared and paid by the SA taxpayer, on which dividends tax is payable. In the case of a natural person, the difference is deemed to be a donation, on which donations tax is payable.

All 79 of the SA tax treaties contain Article 7 as it read before 2010.

• Article 7 as it read before 2010. (selected)
• Article 7 as it reads after 2010. (not selected)
• Other (please provide additional details) (not selected)

South Africa does not follow the AOA in its tax treaties.

South Africa has a reservation to use the profit attribution guidelines as contained in the OECD Profit Attribution Guidelines 2008. Therefore, in determining the profit that needs to be attributed only expenses actually incurred in the year of assessment by the permanent establishment are taken into consideration, for example, pertaining to interest, royalties and other relevant expenses.

Legal ReferenceDispute resolution guide

There are no separate legislative aspects or administrative procedures regarding transfer pricing. Domestic enhanced programmes such as the general Alternative Dispute Resolution (ADR) processes which apply in Corporate Tax matters are similarly applicable in transfer pricing dispute resolution matters

South Africa has introduced APA legislation. The application of the legislation is subject to Commissioner’s Notices that guide the application of the APA. The Commissioner’s Notices to give effect to the APA legislation, is yet to be released.