Transfer pricing as part of SARS’ current strategy

After the abandonment of the government’s initial controversial plan last year to increase VAT by 1% (to be done incrementally via two 0.5% increases), the Minister of Finance emphasised, in the May Budget Speech, that increased tax collections would need to close the revenue gap. The following was said:

“The 2026 Budget will therefore need to propose new tax measures, aimed at raising R20 billion. We have allocated an additional R7.5 billion over the MTEF, to increase the effectiveness of the South African Revenue Service in collecting more revenue. Part of this allocation will be used to increase collections from debts owed to the fiscus. SARS has indicated that this could raise between R20 billion to R50 billion in additional revenue per year. Another part of the additional allocation to SARS will be used to improve modernisation. This will include targeting illicit trade in tobacco and other areas, which should boost revenue over the medium term.”

While transfer pricing was not specifically mentioned, it is no secret that the South African Revenue Service (SARS) and National Treasury – like revenue authorities around the world – see transfer pricing as a key mechanism for closing the tax gap.

However, transfer pricing skills are scarce and in demand. Therefore, SARS faces resource constraints in focusing on the enforcement of transfer pricing. These constraints are not only due to the scarcity of skills but are also financial in nature.

Financial limitations were given as one of the reasons for the delays in the implementation of the eagerly anticipated advance pricing agreement (APA) process.  The original discussion paper on the APA programme was released by SARS in 2020. It stated the following: “It is estimated that it will take three to four years to implement an APA programme.” Given that we are now in 2026 – and that there is still a great deal more work to be done before full implementation is achieved – it can be seen that this process is significantly behind the timing originally indicated.

However, there are clear signs that the process has not stalled. In last November’s Medium-Term Budget Policy Statement, the minister stated that R4 billion had been allocated to SARS – in other words, more than half the total amount indicated in the main Budget Speech for the medium-term expenditure framework.

It seems reasonable to assume that part of this funding has been allocated to transfer pricing. We are aware that SARS has been actively recruiting experienced individuals to form part of a dedicated APA unit. Therefore, it would seem that the capacity building process to build the programme is well underway. However, there is still much to be done – including:

• Upskilling of SARS personnel to handle APAs (presumably including international training).
• Releasing the detailed regulations on the practical aspects of submitting an APA application – including fees to be charged to taxpayers.
• Selecting a test case for a bilateral APA and completing that case

APAs enable multinational enterprises (MNEs) to reach agreement with a revenue authority – or with two or more revenue authorities – regarding the pricing of key intra-group transactions. In view of the cost and disruptions associated with a transfer pricing dispute – as well as the significant amounts of tax potentially involved – APAs are much sought after internationally. They are certainly investor friendly as prospective investors are able to obtain certainty regarding the transfer pricing implications of major transactions. Even for investors not considering applying for an APA, the existence of an APA programme in a country can potentially provide assurance that the country has a reliable and stable tax administration and processes.

However, while the introduction of an APA programme will be an excellent development in the longer term, it is difficult to see how APAs will directly contribute to closing a current revenue gap. This is where enforcement of transfer pricing rules will continue to play an essential role. The SARS personnel tasked with transfer pricing audits will operate separately from those involved with APAs – hence the need for a specific recruitment drive for the APA programme.

SARS’ efforts in the audit space continue unabated; we are aware of multiple transfer pricing disputes at various stages of the overall process – from notifications of audit to Alternative Dispute Resolution (ADR) proceedings, pending court cases and mutual agreement proceedings. It is therefore clear that SARS’ overall strategy in relation to transfer pricing will be multifaceted.

Transfer pricing disputes are very resource intensive due to the complexity of the cases. Therefore, all parties – taxpayers, advisors and SARS itself - face the challenge of insufficient skilled personnel and capacity constraints. However, technology has significant potential for helping to fill this gap.

The country-by-country report (CbCR) of an MNE is potentially a mine of information for revenue authorities when doing transfer pricing risk assessments since it contains a wealth of information regarding the multinational group and its operations. Indeed, at the time when the CbCR rules were introduced, the Organisation for Economic Co-operation and Development  issued a handbook for tax authorities entitled “HANDBOOK ON EFFECTIVE TAX RISK ASSESSMENT”. That handbook provides comprehensive guidance regarding how to assess the transfer pricing risks of MNEs, including providing 19 risk indicators. These include the following (as examples):

• IP is separated from related activities within a group
• There are jurisdictions with significant profits but little substantial activity
• There are jurisdictions with significant activities but low levels of profit (or losses)

It should be feasible to use technology (including AI) to analyse and interrogate the CbCRs of MNEs and identify areas of risk for further exploration by tax authorities. However, we have seen minimal activity from SARS, and indeed from revenue authorities globally, regarding the CbCRs. Yet, they will soon have access to significant amounts of information, namely the Pillar Two returns of MNEs.

It is evident that SARS is investing in transfer pricing-related technology. Last year they issued a tender for the development of a database of comparables. It seems probable that, while some of the additional budget allocated to SARS will have been spent to recruit additional skilled personnel, SARS will also invest in technology tools to support the efforts of transfer pricing specialists.

In summary, we anticipate the following to form a significant part of SARS’ overall strategy in relation to transfer pricing over the short to medium term:

• Continued audit activity to contribute to closing the revenue gap
• Increasing use of technology, including for purposes of risk profiling
• Significant focus, in the next couple of years, on building an APA programme.