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Perspective
04 Feb 2026
5 minute read

The simplified approach for low value-adding intra-group services: Should South Africa consider adoption?

While South Africa’s cautious approach to low value-adding intra-group services is understandable, the adoption of a simplified approach can bring significant benefits.

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With the Budget Speech expected to be delivered by the Minister of Finance, Mr Enoch Godongwana, on 25 February 2026, many await to see what tax proposals will be contained therein. In transfer pricing, not many changes or proposals, if any, are expected. This is because South Africa’s transfer pricing legislation, which is contained in Section 31 of the Income Tax Act, has remained largely unchanged since its introduction. The key reason for this is that Section 31 follows the so-called “arm’s length principle”, and while its interpretation can vary, the concept and its application is nonetheless internationally accepted, especially given existing international guidance.

In South Africa, the South African Revenue Services (SARS) issued Practice Note No. 7[1] in August 1999 (Practice Note) to give guidance on the application of the arm’s length principle. It is in this Practice Note that SARS acknowledges the status of the Organisation for Economic Co-operation and Development (OECD) guidelines[2] as “an important, influential document that reflects unanimous agreement amongst the member countries, reached after an extensive process of consultation with industry and tax practitioners in many countries.” Therefore, SARS views the OECD guidelines as an important document to consider with regards to the application of the arm’s length principle.

Given that transfer pricing remains a complex and contentious area of international taxation, it is therefore not surprising that, while South Africa’s governing legislation does not frequently change, new or updated guidance is released by the OECD and other bodies on a regular basis on the application of the arm’s length principle. One such update is the so-called Simplified approach for low value-adding intra-group services (the simplified approach) introduced in the 2017 version of the OECD Guidelines.

The simplified approach, as outlined in Chapter VII of the OECD guidelines, offers a streamlined method for pricing and documenting services classified as low value adding. The key element of the simplified approach is that where services meet the requirements of low value adding, multinational enterprises (MNEs) can apply a cost plus 5% markup in determining an arm’s length charge for rendering such services. This eliminates the need to prepare complex, and sometimes costly, benchmarking analyses to determine and/or support the markup applied by taxpayers. Therefore, the simplified approach serves as a safe harbour for taxpayers.

South Africa’s current position on the simplified approach

The simplified approach is an elective regime. While several countries have elected to adopt this approach, South Africa, according to the OECD’s latest country profile[3], has not subscribed to its adoption. There may be several reasons why South Africa has chosen not to adopt the simplified approach, which could include, inter alia:

  • Legislative rigidity: South Africa’s transfer pricing legislation does not provide for safe harbour provisions or simplified methods for transfer pricing. Intra-group transactions, regardless of their nature, must be justified with detailed documentation and analysis.
  • Concerns on base erosion: SARS has regularly raised its concerns on base erosion and mispricing. It is possible that SARS is wary of potential abuse of the simplified approach, fearing that it could facilitate base erosion and profit shifting.

Therefore, SARS generally maintains a cautious stance, emphasising the need for robust evidence that services have been rendered and that charges are at arm’s length, regardless of the value or nature of the service.

The SARS Commissioner, Mr. Edward Kieswetter, has on many occasions emphasised the importance of making it is easy for taxpayers to comply with their tax obligations. In fact, this is one of SARS’ nine strategic objectives. Furthermore, it is worth noting that SARS acknowledges, in an addendum to the Practice Note[4], that the preparation of transfer pricing documentation is time-consuming as well as expensive, and therefore, the general rule is that it is not expected of taxpayers to go to such lengths that the compliance costs related to the preparation are disproportionate in nature, scope and complexity.

In view of SARS’ commitment to making compliance easier for taxpayer, and given that benchmarking study can be time-consuming and expensive, also considering SARS’ recognition of the OECD guidelines, there is a strong case for SARS to adopt the simplified approach. After all, the most significant risk in respect of intra-group services does not lie with the mark-up itself, but rather the appropriateness of the cost base, and the allocation thereof.

To mitigate the abuse of the simplified approach, SARS can retain the ability to challenge inappropriate use of the approach. This can include insisting on the performance of a benchmarking study to determine the appropriate mark-up where services are found not to be low value-adding.

Another consideration in whether or not to adopt the simplified approach, could be to take into account the value of the services. For example, large MNEs like banks might be charging significant amounts for information technology and other support services, whereas smaller MNEs might only be charging out much less. The effect of a distortion in markups is therefore much bigger for significant amounts. Therefore, considering the addendum to the Practice Note, it may be appropriate for the large MNEs to benchmark the service fees, but not for the smaller MNEs.

Countries that choose to adopt the simplified approach can derive several benefits, including[5]:

  • Reduced compliance burden: The simplified approach allows for a fixed markup (typically 5%) on qualifying services, reducing the need for extensive benchmarking and documentation. This is particularly beneficial for MNEs with large volumes of low-value transactions.
  • Administrative efficiency: Tax authorities can focus their resources on higher-risk transactions, rather than spending time and effort on low-risk, low-value services.
  • Increased certainty: Taxpayers benefit from greater certainty regarding the acceptability of their transfer pricing policies, reducing the risk of disputes and adjustments.

Conclusion

While South Africa’s cautious approach to low value-adding intra-group services is understandable, the adoption of the simplified approach can bring significant benefits. Reduced compliance costs, increased certainty, and more efficient tax administration are compelling reasons for change. As the global tax environment evolves, it may be time for South Africa to revisit its position and consider whether the adoption of the simplified approach could support its stated objective of making compliance easier for taxpayers.

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[1] South Africa Revenue Service Practice Note No. 7 - Section 31 of the Income Tax Act: Determination of the taxable Income of Certain Person from International Transactions: Transfer pricing.

[2] The Organisation for Economic Co-operation and Development Report on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (updated from time to time).

[3] South Africa - Transfer Pricing Country Profile - July 2025

[4] Transfer Pricing: Addendum to SARS Practice Note 7 Dated 6 August 1999: Submission of Transfer Pricing Policy Document.

[5] United Nations Practical Manual on Transfer Pricing for Developing Countries. 

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Kananelo Lethena

Kananelo Lethena

Associate Director: Transfer Pricing | Deloitte Africa Tax & Legal
+27115174712
Bonolo Ndhlovu

Bonolo Ndhlovu

Consultant: Transfer Pricing | Deloitte Africa Tax & Legal