South Africa is another step closer to the introduction of an advance pricing agreement (APA) regime, with the release of no less than six draft notices setting out the rules of engagement. The deadline for comments was Friday.
The creation of the APA framework is in line with international best practice to give greater certainty to multinational companies involved in related party cross-border transactions. These transactions are highly susceptible for transfer pricing (TP) scrutiny, audits, and costly disputes.
A bilateral APA – which will be the initial focus of the South African Revenue Service – is an agreement between two governments on a group of companies’ transfer pricing policies.
APAs allow a taxpayer and tax authorities to agree in advance on the TP methodology, assumptions, and pricing outcomes for cross-border related-party transactions, says Mathabang Melato, senior transfer pricing consultant at Regan van Rooy, an international tax advisory firm.
“It offers predictability and a meaningful reduction in the risk of double taxation arising from TP disputes. By agreeing methodologies, assumptions, and pricing outcomes up-front, taxpayers can better forecast tax liabilities and mitigate the risk of protracted rulings or litigation.”
For SARS, the APA regime is an instrument not only for certainty but also for strengthened compliance, she adds.
PwC partner Osman Mollagee says besides tax certainty, it increases operational efficiencies, better cash flow, more predictability, and time and cost savings because of lower audit and dispute risks.
Tax disputes can take between five and seven years to be resolved. Although it is also a lengthy process to obtain an APA, particularly a bilateral APA, it can be finalised between three and four years and gives certainty for at least five years, he adds.
Final rules
The first discussion paper on an APA regime for South Africa was released in 2020, and the framework was inserted into the Income Tax Act. The legislation has been in force since 2023, says Natasha Vaidanis, partner and Southern Africa leader for global transfer pricing services at KPMG.
However, the final rules are awaited. SARS will start collating the public comments received on the draft rules. The test phase of the programme will commence once the formal rules are released. Vaidanis expects that the test phase will start in the second half of this year.
Forvis Mazars director Charl Hall says the draft notices relate to who are eligible to apply for an APA, the fees that will be payable, the requirements for rejections, the requirements for processing an application, and the information that will be contained in a preliminary APA. It also sets out the procedures for the implementation and operation of the APA.
Thresholds and costs
In terms of eligibility, the notice reads that “the person” must prove that “the person” had a turnover in excess of R50 billion in the year of assessment preceding the year of assessment in which “the person” requests a pre-application consultation meeting.
An APA will only apply to affected transactions relating to distribution, manufacturing, or imported intragroup services such as marketing. It excludes financial assistance such as loans. The value of the transaction must be in excess of R1 billion for distribution or manufacturing and R300m for intragroup services.
The application costs include a R100 000 pre-application fee (non-refundable). If “the person” is eligible, the processing cost of the application is R1m. There might be “ancillary costs”. These fees are not refundable. Maintaining or extending the APA will cost R100 000 a year.
The application can be rejected if it does not reflect the economic reality of a transaction or if the application differs materially from the information provided during the pre-application consultation.
Exclusionary
Hall says the eligibility criteria is quite exclusionary. The turnover threshold of R50bn is unrealistic because very few companies will qualify. “We believe the threshold is overly restrictive.” He is also of the view that the applications fees are “exorbitant”.
“We believe the only way the regime can work is to make it more accessible. It may be necessary to reconsider the thresholds and the high costs,” adds Hall.
Tuli Nkonki, associate director at Regan van Rooy, says it is also uncertain whether “the person” referred to in the draft notices is a single entity in the group of companies.
“If it is a single entity, it is more than exclusionary because less than a handful of companies will be eligible.” She says it is surprising because global thresholds for the mandatory keeping and submission of transfer pricing documentation is R100m for the sum of the transactions. The threshold for a company to fall within the global minimum tax of 15% is R10bn for a multinational group.
Hall notes that cross-border related party transactions are, by their very nature, complex. Trying to get two revenue authorities to agree on the pricing mechanism of transactions will not be easy.
Although many countries have invested time and effort into setting up an APA regime, many others have decided against implementation. It is unclear which way the process in South Africa will be going, he adds.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law, and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article is a general guide and should not be used as a substitute for professional tax advice.
