Transfer Pricing: SARS opens the door to advance pricing agreements (APAs)

An APA is an agreement between a taxpayer and SARS in terms of which the transfer pricing methodology for the pricing of a taxpayer's cross-border related party transactions are determined in advance for future years.

On 11 November 2020, SARS released a discussion paper on APAs, indicating its intention to have such a system introduced in South Africa (“SA”). The release of this discussion paper should be considered against the backdrop of the increased focus by the South African Revenue Service (“SARS”) on transfer pricing matters and the SA government’s call for more foreign businesses to invest in SA. 

APAs help to avoid transfer pricing disputes, reduce Mutual Agreement Procedures (“MAP”) and create an environment of tax certainty that investors look for before they invest. SA does have an advance tax ruling (“ATR”) system in place which also caters to provide tax certainty. An application for an ATR, in relation to the pricing of goods supplied or services rendered to a connected person, is however not properly catered for in terms of this system. As a result the implementation of an APA system has been recommended by the Davis Tax Committee.

The discussion paper notes that it appears as if SA has fallen behind its peers on the African continent when it comes to putting an APA system in place. The paper notes that this is a dent in SA’s status as a leader on the African continent and its position as a gateway for foreign investment into Africa. The only other African countries which have promulgated APA legislation are however Nigeria, Tanzania and Uganda. It should also be mentioned that the APA programmes in these countries have been largely inactive, with the revenue authorities being hesitant to issue any APAs mainly due to a lack of transfer pricing capacity.      

Given the capacity constraints at SARS, specifically in respect of highly specialized areas such as transfer pricing, the effectiveness with which it would be able to administer an APA system should also be considered. It generally takes from one to four years for tax authorities, which have already implemented these systems, to negotiate an APA with a taxpayer. The time to resolution of an APA also varies significantly based on the nature of the related party transaction being considered, the complexity of the proposed transfer pricing method, and the specialisation of the revenue authority’s staff involved. Given the current capacity constraints at SARS it will likely take much longer for an APA to be concluded with SARS. The discussion paper refers to the possibility that SARS could outsource some of these matters on a temporary basis to obtain the necessary skills in respect of transfer pricing.  

The discussion paper also specifically notes that SARS is still focused on building its transfer pricing capabilities and is not ready to implement an APA system at this stage. SARS notes that it will take three to four years to implement an APA system and suggests a phased approach, given its limited capacity. The discussion paper consequently states that it is important to start with the planning and drafting of legislation in this regard as soon as practically possible. A proposed legislative framework for an APA system is set out, which also interestingly refers to SARS’s capacity and funding constraints which may require it to charge fees for processing APAs, similar to those being charged for ATRs.

It follows that it may still take a number of years before an APA system is fully implemented in SA, although we may see draft legislation issued in this regard in the near future.

The intention of the discussion paper is to obtain comments from interested parties, which should be provided to SARS by 18 December 2020. As mentioned above, the effectiveness with which an APA system would be administered by SARS could be questioned. The indication to introduce such a system in SA is welcomed given the benefit of tax certainty which foreign investors require.


Malan du Toit  

Tax Consultant, Transfer Pricing – Mazars in South Africa