South Africa’s National Treasury and the South African Revenue Service have held a public consultation on the 2026 Draft Taxation Laws Amendment Bill (TLAB) and the 2026 Draft Tax Administration Laws Amendment Bill (TALAB), and the related draft explanatory memoranda. For groups operating in, or considering investment into, South Africa’s special economic zones (SEZs), the most important transfer pricing aspect is the proposed introduction of an arm’s length rule for certain domestic transactions.
The proposal is significant because it would move SEZ-related domestic pricing from a bright-line eligibility test to the arm’s length standard. That shift may reduce cliff-edge disqualification risk, but it also raises practical questions about documentation, corresponding adjustments and dispute resolution.
As with all draft legislation, these proposals may be amended, refined or withdrawn during the legislative process. Nonetheless, the policy direction is clear: domestic pricing arrangements involving preferential tax regimes are likely to attract closer scrutiny.
Domestic Transfer Pricing for Special Economic Zones
Section 12R of the Income Tax Act currently provides for a favourable 15% corporate income tax rate for a qualifying company operating in an approved SEZ. Section 12R(4)(c), introduced to discourage companies operating in an SEZ from artificially diverting profits, withdraws the 15% rate where more than 20% of the company’s deductible expenditure or income arises from transactions with a connected South African resident or South African permanent establishment of a nonresident. National Treasury has acknowledged that this threshold does not always align with ordinary group structures, including arrangements where manufacturing and marketing functions are housed in separate companies or where only part of a supply chain is located within an SEZ.
Clauses 9 and 14 of the TLAB propose replacing the disqualification rule with a new section 31B. An “affected domestic transaction” would arise between an SEZ qualifying company and a connected resident person that is not a qualifying company where a term or condition differs from what independent parties would have agreed. If a party derived a tax benefit from that difference, its taxable income would have to be calculated as if arm’s length terms had applied. The proposed rule—which represents a material shift in policy—would apply to years of assessment commencing on or after 1 January 2027.
If enacted, section 31B would be the first arm’s length rule in the Income Tax Act directed specifically at transactions between two South African residents. Eligibility for the reduced SEZ rate has, until now, been driven largely by a threshold calculation. Under section 31B, it would become an annual pricing and evidence question, with 12 percentage points at stake between the 15% SEZ rate and the 27% standard corporate income tax rate. The draft explanatory memorandum states that the rule is intended to apply to goods and services—including intragroup services that may shift profits without any physical movement of goods — and to operate consistently in line with the OECD Transfer Pricing Guidelines and the United Nations Practical Manual on Transfer Pricing.
Points Requiring Clarification
The bill provides for an adjustment only in the hands of the party deriving the tax benefit. It does not provide a corresponding downward adjustment for the counterparty, creating a potential risk that the same profit could be taxed twice within South Africa. The draft explanatory memorandum notes the absence of a secondary adjustment on the basis that intercompany dividends are exempt from dividends tax. However, a secondary adjustment and a corresponding adjustment serve different purposes. It should be noted that comparable African rules, such as Botswana’s, specifically address corresponding adjustments for domestic transactions.
There is also a discrepancy between the bill and the draft explanatory memorandum regarding the identity of the counterparty. The memorandum refers to transactions between resident companies, while the bill refers to any connected resident “person.” As drafted, the provision may therefore extend to connected trusts, individuals or partnerships. The bill also does not contain a de minimis threshold, which means that smaller SEZ businesses could face the same analytical burden as large integrated groups.
No specific documentation standard is proposed. Public Notice 1334, issued under section 29 of the Tax Administration Act on 28 October 2016, applies to “potentially affected transactions” defined by reference to section 31, which requires a nonresident party. A section 31B transaction between two residents cannot trigger that notice. Taxpayers may nevertheless face understatement penalties under section 223 of the Tax Administration Act and interest under section 89quat of the Income Tax Act following an adjustment, without a prescribed standard against which their domestic transfer pricing support can be measured.
There would also be no dedicated transfer pricing dispute-prevention mechanism or treaty-based resolution procedure for a section 31B transaction. As this is a wholly domestic matter, any dispute would likely proceed through the ordinary objection and appeal process.
Experience Elsewhere in Africa
Botswana provides the closest structural comparison because it targets domestic transactions only where a preferential tax regime creates a pricing incentive. Its domestic transfer pricing rules are generally switched off except when one or both resident parties are an International Financial Services Centre company, taxed at 15% compared with the 22% standard rate. Regulations address corresponding adjustments for domestic transactions separately from international adjustments. Separately, its BWP 5 million documentation threshold is derived from a Commissioner General ruling rather than by amendment to the regulations.
Kenya and Rwanda illustrate how preferential-regime rules can broaden over time. Kenya's section 18A applies to related party transactions involving preferential regimes, including SEZ and export processing zone entities, and the Finance Act 2022 expanded the definition of a preferential regime beyond designated zones. Rwanda's 2026 rules retain domestic related-party transactions within scope and apply to certain dealings with beneficial tax regimes irrespective of whether the parties are related.
Other African regimes have addressed similar practical questions in different ways. Mozambique requires a corresponding adjustment for the other domestic taxpayer where one taxpayer’s profits are corrected. Ghana and Tanzania use documentation thresholds, while Ghana provides a simplified approach and safe harbour ranges. Zimbabwe requires disclosure of domestic related party dealings in its transfer pricing return. Tanzania permits a tested party outside the jurisdiction if the relevant information, including financial statements, is made available. What these regimes have in common is that domestic rules did not arrive in isolation: each is paired with a documentation threshold, disclosure mechanism, simplified approach or a stated position on comparables.
Practical Implications
For taxpayers, these comparative examples point to the same practical conclusion: if South Africa adopts a domestic arm’s length rule without parallel guidance on documentation, relief from double taxation or simplified compliance, taxpayers may need to build their own support framework before SARS provides more detailed direction.
Affected groups should begin by mapping all domestic connected-party transactions into and out of their SEZ entities. Particular attention should be given to intragroup services, cost allocation keys, benefit evidence and the mark-ups applied to shared costs. Existing agreements and transfer pricing policies may not cover domestic dealings because both parties have historically fallen outside section 31. From a governance perspective, tax teams should also consider whether finance, operations and procurement teams understand that domestic arrangements may now need the same level of pricing discipline as cross-border transactions.
The repeal of section 12R(4)(c) may also create an opportunity. Groups previously disqualified by the 20% threshold, or deterred from locating part of a supply chain in an SEZ, may be able to access the 15% rate provided their pricing can be supported.
The key message is that this proposal should not be viewed only as a compliance change. It is a prompt to reassess SEZ operating models, domestic service flows, internal charging policies and the quality of transfer pricing evidence before the rules take effect. Early review should place taxpayers in a stronger position to manage risk and identify opportunities that may have been constrained under the current threshold-based regime.
Marcus Stelloh
BDO in South Africa