SARS issues long awaited guidance on the treatment of intra-group funding transactions for transfer pricing purposes.

On 17 January 2023 the South African Revenue Service (SARS) issued Interpretation Note 127 (IN 127) providing long awaited guidance as to the treatment of cross-border intra-group funding transactions for transfer pricing purposes.

Thin capitalisation rules and transfer pricing legislation were introduced in South Africa in 1995. In terms of the guidance, certain adjustments could be made to cross-border intra-group funding transactions considered excessive. Practice Note 2, issued 14 May 1996, and the applicable thin capitalisation legislation was the main guidance as to how the transactions should be considered. The rules and Practice Note have since been repealed and are not applicable to years of assessment commencing on or after 1 April 2012.

For years of assessment commencing on or after 1 April 2012 the transaction(s) are covered by section 31 of the Income Tax Act. This would entail it to be considered under the general transfer pricing considerations, ensuring that it adheres to the arm’s length principle.

The following are key take aways from IN 127 issued by SARS that taxpayers with cross-border intra-group funding transactions should take note of:

  • IN 127 represents the view and consideration in terms of the transaction(s) by SARS for years of assessment commencing on or after 1 April 2012.
  • Taxpayers are to consider the arm’s length nature of both the interest rate and the borrowing capacity (gearing ratio’s).
  • The transaction(s) are to be evaluated from both the borrower and the lender’s perspective.
  • The Organisation for Economic Co-Operation and Development (OECD) Guidelines, updated version issued in 2022, is to be relied upon from a transfer pricing perspective when evaluating the arm’s length nature of funding transactions.
  • Should the transaction(s) not be at arm’s length, the relevant transfer pricing adjustments (primary adjustment, amendment to tax computation and taxable income effect, and secondary adjustment, which is a deemed dividend/donation attracting dividend withholding tax or donations tax) are to be made by the taxpayer in the relevant year of assessment.
  • Appropriate supporting documentation should be kept in respect of the analysis of the transaction(s). This would include economic analysis (benchmarking), functional and risk analysis which should be incorporated into transfer pricing documentation.
  • There are no materiality thresholds being considered in respect of the funding transactions.
  • There are no thin capitalisation or other safe harbours (i.e. previous reference to a debt:equity ratio of 3:1).
  • The transfer pricing and arm’s length considerations are to be evaluated under section 31 before any section 23M or 23N application under the Income Tax Act, as amended.

Taking the above into consideration could help to decrease the transfer pricing risks faced by taxpayers and help ensuring that taxpayers are adhering to the arm’s length principle, avoiding potential transfer pricing adjustments.

For ease of reference please click here to IN 127 on SARS’s website.


Charl Hall

Senior Manager, Tax Consulting

14 February 2023