Rethink - Transfer Pricing | Critical success factors for establishing an Advance Pricing Agreement programme in South Africa

Purpose for establishing an APA programme in South Africa

10 December 2021 was a day many in the transfer pricing, and perhaps wider tax, community in South Africa have been waiting for – draft legislation for the formation of an “advanced pricing agreement” (APA) programme (hereinafter referred to as “the programme”). Although the draft framework contains certain elements that may be a cause of concern in the South Africa tax community, this development is a welcome step in the process of implementing an APA programme.

An APA, in short, is an agreement between a taxpayer and a tax authority (e.g., South African Revenue Service, or “SARS”) in which the transfer pricing methodology for the pricing of a taxpayer's cross-border related party transactions is determined in advance, i.e., for future years. The proposed framework published by SARS for the programme has the following features:

  • A pilot project will be put in place to develop and refine the model
  • Only bilateral APAs for now,[1] with potential later expansion into multilateral APAs
  • The framework includes:
    • A high-level process flow involving various stages of the APA process
    • Draft legislative terms and concepts
    • Defined scope and purpose

The intention of an APA programme is to provide a formal mechanism for taxpayers and tax administrations to have more certainty regarding the arm’s length nature of cross-border related party transactions. Furthermore, according to the SARS, the necessity of the APA unit is foundational in advancing their strategic agenda and restoring the organisation to world-class status.

Gaps and challenges

Upon our review of the framework for the programme, it was brought to our attention that there are noticeable gaps, specifically in the definitions section of the draft legislation, section 90A. While often overlooked at first, definitions can be extremely important, and the framework should both comprehensively and clearly document key terms and concepts. The importance of clearly defined terminology reinforces the principle of tax certainty amongst affected taxpayers.

We specifically note the following:

  • “Advance pricing agreement” makes reference to “associated enterprises and connected persons.” Now, we in the South African transfer pricing community are eagerly awaiting the inclusion of the Organisation for Economic Co-operation and Development’s (OECD) “associated enterprise,” as contemplated in Article 9 of the Model Tax Convention on Income and on Capital. We point out that, by definition, one can be an associated enterprise, but not a connected person, as defined in the South African Income Tax Act; however, one would always be an associated enterprise if meeting the requirements of a connected person. SARS should clarify this distinction as some taxpayers’ related party transactions may not qualify for the programme. One possibility is to simply change the “and” to an “or.”
  • ”Arm’s length transfer price” is defined as “a transfer price in respect of an affected transaction that would have been the price in respect of the transaction if the participants in the transaction had been dealing at arm’s length with each other.” We find this a circular and confusing definition, and it should rather reference the OECD’s Chapter I of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines), which in turn refers to paragraph 1, Article 9 of the OECD Model Tax Convention, providing:

[Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

  • “Compensating adjustment” is defined as “an application of the most appropriate transfer pricing method, as agreed to in an advance pricing agreement, to an affected transaction and the attribution of the income from the affected transaction to be taxed in one or more countries.” This definition should not be confused with that as defined in the OECD Guidelines in its Glossary and further described in Chapter IV, which defines a compensating adjustment, generally, as an adjustment to align a reported transfer price to an arm’s length transfer price prior to the filing of an income tax return.
  • “Transfer price” is defined to mean “the price at which connected persons or associated enterprises trade a service, tangible property or intangible property with and among each other across international borders in an affected transaction.” This definition appears to exclude financial transactions, rents, and others. SARS should clarify if only certain categories of transactions qualify for the programme.

Beyond quibbling over the semantics of the APA terms in Section 90A, we find that, in general, implementation of an APA programme in South Africa may be difficult due to the realities on the ground. The following are fundamental challenges that will affect the success of the APA programme:

  • An APA application is a time-consuming and costly process which may deter taxpayers from engaging with SARS.
  • In our experience, engagement with SARS is often fraught with delays and extensions. This may put timelines and trust in the system at risk.
  • The recent public debacle of SARS and top government officials’ involvement in the “State Capture” inquiry, and pervasive corruption, has weakened public trust.
  • For an APA system to prosper, it requires substantially skilled personnel. SARS acknowledges the difficulties in finding the appropriate personnel to staff an APA programme that is proposed to be independent from the existing Transfer Pricing Unit. Therefore, in the early stages of the APA programme, there may be cross-collaboration between the two units. Whether this opens up potential inquiries for audit is an unknown risk to taxpayers.
  • SARS should consider including secrecy provisions so that the taxpayer’s confidentiality, including that of the outcome of the APA application, are protected. When SARS is at a point of having an APA Unit separate from the Transfer Pricing Unit, secrecy provisions should require an information barrier between the teams, so that rejected applications do not have an unintended result of taxpayers then being audited for transfer pricing on the same transaction.

What can a successful APA programme include?

Continuing with the spirit of an APA to provide certainty, SARS should incorporate a list of factors which are more likely to result in a request for an APA being accepted, to provide taxpayers with a better understanding of the key factors of eligibility. Factors could include:

  • There is a high likelihood of double taxation arising if there is no APA in place, e.g., the same type of transaction(s) has already been subject to Mutual Agreement Procedures (MAP) in respect of an earlier year.
  • The taxpayer is applying a bespoke transfer pricing methodology to the transaction(s).
  • Application of a transfer pricing methodology that is complex and/or requires complex calculations, e.g., certain profit split calculations.
  • Reliable comparables are not readily available and/or significant and complex adjustments are required to the comparables.
  • The transactions which are to be covered by the APA have already been entered into or are about to be entered into (i.e., are not hypothetical) and are not expected to change throughout the APA period.

SARS should consider the implementation of the roll-back of APAs in appropriate cases to foster the BEPS Action 14: Making Dispute Resolution Mechanisms More Effective notion of ensuring the consistent and proper implementation of tax treaties.


The implementation of an APA programme in South Africa may level the playing field of SARS in the worldwide transfer pricing domain – for many this development has been long overdue. Implementation will no doubt require a lot of hard work and dedicated effort from public and private actors alike.  Despite certain gaps and challenges identified, which SARS should proactively address with input from key stakeholders, we see the framework as a giant step in the right direction.


[1] Meaning the APA will also need to be reviewed and agreed by a competent authority in the jurisdiction of the counterparty

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Associate Director, South Africa

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