Transfer Pricing News Issue 32 - December 2019

Amendments to South African transfer pricing regulations 

The South African Taxation Laws Amendment Bill (TLAB) has been released – the first material change to the transfer pricing regulations in South Africa for some time. The current inclusion of the “associated enterprise” definition into the transfer pricing regulations is welcomed as it aligns South African legislation to global standards, but it may come with some controversies.

The TLAB has not removed the connected person concept within section 31, but added the associated enterprise definition to the affected transaction definition, applicable from 1 January 2021. Therefore, a transaction, operation, scheme, agreement or understanding still has to fall within the four provided scenarios under section 31(1)(a), but now the persons in relation to the affected transaction can be either a connected person or an associated enterprise.  

Associated enterprises

Two enterprises are considered associated enterprises if one of the enterprises meets the conditions of Article 9, sub-paragraphs 1a or 1b of the OECD Model Tax Convention, with respect to the other enterprise. This includes an enterprise which could be the same person (such as a branch), that participates directly or indirectly in the management, control or capital of another enterprise (again potentially including the same person). As such, an associated enterprise definition includes more parties than a connected person definition would. 

This change will bring some complexities as to what an associated enterprise is in relation to a taxpayer, and it may include some scenarios where the parties are not related from an equity or capital perspective, but management or control is exercised. This is due to the definition of control, which may include economic control. 

To clarify: two independent parties, where one party exclusively sells to another could be seen to be under the control of the buyer if the buyer is able to control the price charged. Another concern with the associated enterprise definition is that certain countries may interpret the definition differently, especially around control, and this could lead to double taxation.

Due to the way the transfer pricing legislation is currently worded, a head office and its branch or permanent establishment are not caught by the South African transfer pricing regulations. Therefore, this type of transaction would be dealt with under the relevant double tax treaty (DTA), and without a DTA this may result in double taxation. This has been a concern for the South African Revenue Service (SARS) for a while, as this also means that the related compliance requirements are not triggered. Arguably, the inclusion of the associated enterprise definition still does not get around this, as the four scenarios under 31(1)(a) will have to be satisfied first, and here the legislation still refers to “other person”. We recommended that this should be changed to “person” or “other/same person” to fully align this with the concept of associated enterprise, but this was not implemented. It will be interesting to see how this is going to be interpreted by the different stakeholders.   


Even though the inclusion of the definition is positive, as it adheres to global standards, keeping the old version for ‘connected person’ clouds the issue. One thing is clear - this will result in additional taxpayers being caught under this section, and multinationals transacting in South Africa should look again at section 31 to determine if they now meet the associated enterprise definition. If this is the case, section 31 will be applicable and certain compliance requirements may kick in, such as the submission of local files and the transfer pricing documentation retention requirements. 

Marcus Stelloh