Transfer Pricing News Issue 41 - December 2022

Transfer pricing net broadened with introduction of Associated Enterprises Concept

To be [associated] or not to be? That is the question - though not for Hamlet in this instance, but for taxpayers resident in South Africa, as well as foreign companies with a South African presence.

After a few years of implementation delays, the South African Revenue Service (SARS) will formally introduce the concept of “associated enterprises” into South Africa’s transfer pricing regulations effective 1 January 2023. The current definition of “connected person” will remain intact. The introduction of the associated enterprises concept will broaden the transfer pricing “net.” The changes will pertain to years of assessment starting on or after 1 January 2023.[1]

To provide guidance on determining whether a taxpayer fits the definition of associated enterprises, SARS published a draft interpretation note (IN) on 14 October 2022. The IN acknowledges that the current transfer pricing rules, based solely on the connected party definition, may not always capture arrangements between associated enterprises, where, by virtue of the association, there is significant influence over the determination of transfer prices. To correct for this, and to bring the legislation in line with international standards, the term associated enterprise, as contemplated in Article 9(1) of the Organisation for Economic Co-operation and Development’s Model Tax Convention, has been inserted into the South African transfer pricing rules.

The IN does not define the term itself, but rather refers to Article 9. This very broad definition states that two enterprises are associated enterprises when:

  • An enterprise of a contracting state participates directly or indirectly in the management, control or capital of an enterprise of the other contracting state, or 
  • The same persons participate directly or indirectly in the management, control or capital of an enterprise of a contracting state and an enterprise of the other contracting state.

Various stakeholders have provided feedback to SARS noting that applying “associated enterprises” in the current format is too broad and should be defined specifically. However, no additional guidance appears to be on the horizon and taxpayers must prepare for the 1 January 2023 effective date.

Taxpayers must now consider whether they fall into this wider South African transfer pricing net. Related-party arrangements between parties in any of the following circumstances may result in additional transfer pricing compliance requirements:

  • Entities with direct or indirect participation in management  
  • Entities where there is direct or indirect control
  • Entities with direct or indirect participation in capital
  • A South African head office and its foreign branch or vice versa (that is, the same legal entity)

Taxpayers should also review cases in which economic dependency exists between parties that would not normally exist between independent parties transacting at arm’s length

Back to Shakespeare: rather than revert to a melancholic soliloquy on your company’s existential status in this complex transfer pricing world, we simply recommend that multinational enterprises with a South African presence review their cross-border arrangements to confirm whether the amended rules apply to such arrangements and entities not previously captured. Relevant transfer pricing compliance requirements (such as filing of transfer pricing documentation) can then be considered accordingly.

Marcus Stelloh

Patrick McLennan


[1] For South African transfer pricing purposes, related-party “arrangements” means any “transaction, operation, scheme, agreement, or understanding.”