New SARB Circular on Royalties and Service Fees: Transfer Pricing Under the Spotlight

On 26 November 2024, the South African Reserve Bank (SARB) issued Circular 13/2024, marking a significant policy shift in the treatment of royalty and service fee payments by South African resident entities to non-residents. While the Reserve Bank’s remit is exchange control, the Circular introduces tighter scrutiny with direct implications for transfer pricing compliance.

In this newsletter, we unpack the key changes, highlight the interaction with South Africa’s transfer pricing framework, and outline why proactive planning is essential.

Background: What Is Circular 13/2024 All About?

Circular 13/2024 replaces prior guidance on cross-border payments for royalties and service fees. SARB now requires more detailed motivation, supported by benchmarking and intercompany agreements, for approval of such payments.
Notably, this is not just an administrative exercise. The requirements align closely with SARS’ transfer pricing principles, blurring the lines between exchange control compliance and tax risk management.

Key Changes Introduced

1. Stricter Approval Conditions for Royalties

1. Applicants must now provide detailed commercial justifications for royalty payments, including clear explanations of the intellectual property involved, its value to the South African entity, and its relevance to the payer’s business operations.
2. SARB expects royalty rates to be benchmarked against third-party arrangements using appropriate transfer pricing methodologies.
3. There is a renewed emphasis on IP ownership. Where the non-resident licensor is not the legal or economic owner of the IP, approval may be withheld.

2. Expanded Documentation Requirements

1. Applicants must submit a transfer pricing report and comparable benchmarking analysis justifying the pricing of both royalty and service fee payments.
2. Intercompany agreements must be submitted up front and must clearly define the nature of the services or IP licensed, the basis for pricing, and the benefit to the South African payer.
3. Where head office or group-wide services are charged, applicants must prove that the services were actually rendered and that they are not duplicative or shareholder in nature.

3. Assessment of ‘Benefit Test’

1. SARB will scrutinise whether the South African payer derives a direct or indirect benefit from the service or IP being paid for.
2. Circular 13 confirms that approvals will be denied for payments that are not supported by clear commercial value, or where the benefit to the South African entity is ambiguous.

4. Monitoring of Cumulative Payments

1. SARB may question cumulative or recurring payments under long-term agreements and expects periodic reviews of royalty and service arrangements.
2. Where rates escalate over time, SARB may demand updated benchmarking studies or re-justification of the rates.

Transfer Pricing Implications

While SARB is not a tax authority, the practical effect of this Circular is to subject royalty and service fee payments to a quasi-transfer pricing audit before they are approved.
Some key implications:

• Pre-approval documentation is now critical. Failure to provide a full TP report and defensible intercompany agreement may result in approval delays or outright refusals.
• Benchmarking must be robust. A generic or group-wide study will likely not suffice. Local comparables, functional analysis, and clear pricing rationale are expected.
• SARS alignment. Information submitted to SARB could become discoverable by SARS during TP audits, meaning inconsistencies may create red flags.
• Historic arrangements under scrutiny. Even existing agreements may need to be revisited, especially if extensions or increases in payments are sought.
• Broader impact on MNE policy. South African subsidiaries may need to review global policies and consider whether head office charges or IP structures comply with both SARB and SARS expectations.

Who Is Affected?

This Circular will affect all South African entities making (or planning to make) cross-border payments for:

• Trademarks, patents, know-how and other IP
• Management, technical, or administrative services
• Group-wide IT, HR or finance support
• Regional or global shared service centre charges
• Franchise or distribution agreements involving IP

Sectors particularly impacted include FMCG, automotive, pharmaceuticals, financial services, technology, and franchising.

Our Take

This development represents a coordinated tightening of South Africa’s regulatory environment, bridging exchange control and tax compliance. It elevates the compliance burden and increases the risk of dispute or delay, especially for multinationals with complex IP or service arrangements.
Businesses should not assume that existing exchange control approvals will be renewed under the same terms.
Now is the time to:

• Review existing royalty and service fee arrangements
• Prepare or update benchmarking studies
• Ensure intercompany agreements are clear, current, and commercially defensible
• Align documentation submitted to SARB with that on file for SARS
• Consider the need for TP policy adjustments in light of SARB’s evolving position

We Can Help

Regan van Rooy advises on the full spectrum of cross-border pricing and structuring issues, including preparation of TP reports, policy design, and interface with both SARB and SARS. We can assist in preparing robust applications for royalty and service fee approvals, aligning legal documentation and economic substance.
If your South African entity is affected or you’re unsure of your exposure, contact us today to set up a consultation. A stitch in time really does save nine.

Please get in touch with your usual contact or email us at info@reganvanrooy.com if you would like to review your intercompany arrangements in light of Circular 13/2024.