The South African Revenue Service (Sars) will this year usher in an advanced pricing agreement (APA) regime in one of the most fundamental reforms of tax administration to date as part of measures to rein in transfer pricing activities.
The tax agency has been recruiting specialists in the area of transfer pricing, with the Edward Kieswetter-led agency expected to take APA applications from multinational companies from as early as June.
An APA is a binding arrangement between a multinational company and one or more national tax authorities, predetermining the method the company will use to calculate transfer prices for transactions between its related entities.
The move by Sars brings to life the recommendation of the Davis tax committee to implement an APA programmme in South Africa, with the aim of providing tax certainty for multinational enterprises regarding transfer pricing.
One of the reasons South Africa has delayed introducing APAs is the scarcity of transfer pricing expertise in the country.
Sars told Business Day it has undertaken external recruitment to build its APA institutional and technical capacity and capability, with funding for eight positions formally secured and allocated.
Six roles filled so far
“To date, six of these specialised and highly technical roles have been filled by suitably qualified and experienced professionals with the requisite technical expertise and this will be further strengthened with additional staff as the unit continues to expand its work,” it said.
“Sars will also provide clear, formally published guidelines and directives detailing the scope of covered and excluded arrangements. This transparency is intended to help taxpayers assess and submit applications with confidence, reinforcing credibility and trust in the programme.
“The APA programme demonstrates Sars’ commitment to the responsible stewardship of public revenue and aims to create a stable, transparent and predictable regulatory environment for cross-border investment, fostering fairness, certainty and confidence in the tax system. While Sars is committed to voluntary compliance it will act decisively where non‑compliance is intentional or persistent.”
The APA programme demonstrates Sars’ commitment to the responsible stewardship of public revenue and aims to create a stable, transparent and predictable regulatory environment for cross-border investment, fostering fairness, certainty and confidence in the tax system. While Sars is committed to voluntary compliance it will act decisively where non‑compliance is intentional or persistent.
Transfer pricing continues to be an income tax issue facing many multinational groups worldwide.
As tax authorities seek to ensure that transactions are conducted at arm’s length, companies engaging in international operations often face heightened transfer pricing scrutiny and the risk of double taxation.
APAs are therefore seen to offer a way to attain certainty by enabling taxpayers to proactively negotiate with tax authorities to establish the right transfer pricing methods for their transactions.
Some of the benefits to be derived by the multinationals from entering into voluntary APAs with Sars include a clear understanding of how their intercompany transactions will be treated for tax purposes and by agreeing to certain transfer pricing methodologies in advance APAs help prevent transfer pricing disputes and potential audits.
Michael Hewson, founder at Graphene Economics, a specialist transfer pricing advisory firm, said the move by Sars was long overdue.
“It is a very positive development for multinational enterprises as it has the prospect of increasing certainty. There are a number of companies that are very keen to enter into APAs and have been waiting for the opportunity to apply for it,” he said.
“APAs have been implemented in many other countries and especially where the transactions are very complex and high value, the potential for tax certainty is highly beneficial. Hopefully Sars will soon communicate the timelines for the pilot programme.”
Multinational enterprises play important roles around the world and even more so when they invest in developing countries such as South Africa, which need foreign direct investment as a means to grow their economies and lift the majority of their populations out of poverty.
However, companies are generally driven by a profit motive, which may result in them engaging in harmful practices that erode the tax bases of developing countries through transactions that are not at arm’s length and are complex and time-consuming to audit.
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