Gonna need a bigger boat? South Africa’s Transfer Pricing net gets cast ever wider

The talk of the tax town for months now has been that the ambit of transfer pricing rules in South Africa (principally governed by Section 31 of the Income Tax Act), will be expanded beyond “connected persons” to also include “associated enterprises”.   This is a big deal as it is a radical expansion to the transfer pricing landscape in South Africa, as the rules will now apply much more broadly.  See our previous article on this here.

Basically, the Transfer Pricing (“TP”) rules, with effect from 1 January 2023, will apply to both connected persons and associated enterprises for years of assessment on or after that date.

Ostensibly to clarify what this means (ha!), SARS has recently issued a draft interpretation note providing “guidance” on what on earth associated enterprises are and how this will impact section 31. The interpretation note is still in draft, and interested stakeholders can provide comments by 13 January 2023.

So how will the inclusion of associated enterprise affect you?

Essentially, after almost 30 years of TP rules in SA, taxpayers now need to go back to the drawing board and re-assess their group structures to redefine the entities within the scope of TP rules, i.e. also identifying associated enterprises and including these within their TP documentation.  Remember, connected persons and associated enterprises are not mutually exclusive, i.e. the relations between entities could be either or both or none at all.

In theory, two entities will be considered associated enterprises if one of the enterprises participates directly or indirectly in the management, control, or capital of the other or if the same persons participate directly or indirectly in the management, control, or capital of both enterprises (i.e. if both enterprises are under common control).

Ok great, but what does that actually mean in real life?  Well nobody really knows, as assessing whether any of the above requirements are met is not straightforward, as there are no strict definitions of what management, control, or participation in capital actually means in real life.  To make matters worse, the examples in the SARS interpretation note are pretty toothy and far-reaching.

For example, a board director who serves on two otherwise unrelated entities may indicate “management”, and even worse if two otherwise unrelated entities happen to share a major customer or supplier that customer may be perceived to have “control” on key functions such as pricing.  Some of these examples cannot commercially make sense – how can it be that two unrelated companies who happen to have a shared director or major customer have to document any transactions from a TP perspective?!  So, SARS has cast its net very, very wide and the water is dark and cold.

What next? 

Well, it’s time to carefully check what entities could be considered associated with you and to ensure that you are ready to demonstrate all transactions with such entities at arm’s length.

Of course, as with all tax matters, the onus is on the taxpayer to ensure they are covered. So put your life jacket on and contact our team of transfer pricing experts for further information.