The transfer pricing environment in South Africa is changing rapidly, influenced by global regulatory changes, economic challenges and advancements in technology. And CFOs have a role to play in keeping their companies ahead of these shifts, ensuring compliance and effective risk mitigation.
Sars has also intensified its focus on transfer pricing, leading to increased audits and investigations. Companies are required to demonstrate that their relevant operations have the necessary resources and functions to justify reported returns. As a result, comprehensive documentation explaining transfer pricing policies and methodologies have now become crucial.
Moreover, collaboration between tax authorities is also increasing across the continent, facilitated by initiatives from the African Tax Administration Forum (ATAF) and Tax Inspectors Without Borders. These promote information exchange and a more standardised audit approach. Added to this is the growing role of technology in managing transfer pricing risks, with companies now being able to leverage data analytics and automation tools.
The Covid-19 pandemic and economic uncertainties have also contributed to supply chain restructuring, creating new challenges for companies in determining efficient pricing between different business segments.
In response to the trends above, South Africa has now introduced advance pricing agreements (APAs), as a mechanism for obtaining certainty regarding transfer pricing arrangements – however, the rules around APAs are yet to be determined.
Balancing tax efficiency and compliance
While South Africa’s transfer pricing regulations align with international standards, given Sars’s increasing focus on enforcement, multinationals still need to invest in thorough documentation to justify their transfer pricing positions. And this, together with frequent regulatory changes means it can be a costly and time-consuming exercise.
Added to this, are the current economic pressures, including the impact of South Africa’s greylisting, which has led many multinationals to restructure their operations and supply chains, all while trying to keep pace with technological advancements to manage compliance risks effectively.
As a result, balancing tax efficiency with regulatory compliance is not only a challenging task, but it requires strategic decision-making. Multinationals must not only determine which functions to manage internally, and which to outsource, but they need to ensure this is undertaken while still maintaining control and governance over compliance – and optimising resource allocations.
Increased government expenditure and the need for improved tax collections have led Sars and other revenue authorities to intensify their focus on tax compliance. Consequently, there has been a rise in tax audits and disputes, particularly in the highly technical area of transfer pricing.
Given the global economic downturn and other external challenges, South African companies are now finding it increasingly difficult to achieve ‘arm’s length’ results based merely on historical data. As a result, disputes between taxpayers and Sars have become more frequent and complex. Moreover, Sars-imposed transfer pricing adjustments can be costly due to secondary adjustment rules, which cause an additional 20 percent dividend withholding tax impact over and above the normal tax rate.
To mitigate these risks, companies must ensure their transfer pricing documentation thoroughly demonstrates its commercial reality and adequately quantifies key considerations.
If a dispute arises, it is prudent to consider litigation as a last resort due to its costly and time-consuming nature. Instead, businesses can explore alternative dispute resolution mechanisms, such as settlements and mutual agreement procedures.
Not just a compliance exercise
Recently, mediation has also emerged as a potential resolution method, despite not being formally legislated. However, the introduction of APAs by Sars represents a significant step toward providing multinationals with greater transfer pricing certainty.
South Africa requires contemporaneous transfer pricing documentation, ideally updated annually, in line with the disclosure requirements of the annual income tax return. Since adopting the BEPS Action 13 recommendations, South Africa mandates the submission of a Master File and a Local File for companies meeting prescribed thresholds.
However, transfer pricing should not be treated as a mere compliance exercise. Instead, it is an integral part of a company’s business operations, which means that the documentation must accurately reflect the organisation’s current practices. Regular reviews of transfer pricing policies is therefore essential if businesses want to remain aligned with evolving industry trends, and regulatory developments.
