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The South African Revenue Service (Sars) has settled on R10bn annual revenue as an eligibility criterion for multinationals wishing to enter into advanced pricing agreements (APA) with it. These agreements provide upfront tax certainty for qualifying cross-border related-party transactions.The R10bn figure, gazetted on Friday as the tax agency moves to implement an APA regime that has been on the cards since 2020, is a huge cut to the R50bn that the agency had initially proposed. Tax experts and large companies raised concerns during the public consultation process that the R50bn revenue eligibility was unrealistic.The South African Institute of Chartered Accountants (Saica) in its submission to Sars argued that more than R50bn per taxpayer is excessively high and “disconnected from the commercial realities” of the South African market. “For example, the country-by-country reporting threshold is R10bn for consolidated group revenue, as opposed to a single company’s revenue, and only approximately 60 MNE [multinational enterprises] groups in South Africa meet the R10bn consolidated group revenue threshold.“Very few taxpayers in South Africa would meet the R50bn revenue threshold, which would render the APA programme inaccessible to the vast majority of taxpayers facing genuine transfer pricing complexity and uncertainty.“The proposed threshold risks undermining the broader policy objectives of the APA regime. APAs are intended to encourage proactive compliance, provide certainty, and reduce disputes before they arise. “Restricting access to only a very limited number of exceptionally large taxpayers materially reduces the utility and relevance of the programme.”Another criterion is that the value of the affected transaction for each of the years of assessment must exceed R1bn for a distribution or manufacturing function or R300m for intragroup services.Transfer pricing has become one of the most material tax risks facing businesses engaged in cross-border transactions. Restricting access to only a very limited number of exceptionally large taxpayers materially reduces the utility and relevance of the programme.APAs are a legally binding contract between multinational firms and tax authorities that seek to fix the transfer pricing method for future cross-border transactions, primarily to avoid expensive tax disputes and double taxation.The introduction of an APA regime to South Africa’s tax framework has been a combination of much deliberation and consultation given the sheer scale of implementing such a regime.The groundwork for the APA regime was laid in 2020 following the publication of a discussion paper on APAs that examined whether and how to introduce an APA regime, outlining the rationale, potential designs and challenges.One of the challenges is the lack of Sars capacity. To address this, the tax agency has over the past year been recruiting experts on the subject matter as it builds internal capacity.Moody’s Analytics UK won a contract with Sars to provide the agency with transfer pricing benchmark tools.A benchmarking study is the most critical part of any transfer pricing analysis contained in a compliance or policy document and is mainly used to test the arm’s length nature of the connected persons’ transactions.Canny multinational firms use the technique of transfer pricing to shift profits out of countries where they operate into tax havens. This can be done through a subsidiary of a multinational in a tax haven charging artificially inflated prices from a sister subsidiary in a country with higher taxes — essentially moving profits out of a country where it genuinely does business to a tax haven — thus avoiding taxes.Since South Africa’s re-emergence in the international market, there has been a marked expansion of international trade and commerce, with wide-ranging changes in volume and complexity, with an increasing proportion of this international activity carried on between members of multinational companies.The Sars’ government notice also outlines the fees that will be paid by companies wishing to enter into APAs with it. Companies will need to pay a pre-application consultation fee of R100,000 and a R1m cost recovery fee for the processing of the application for an APA.The agency said companies will be disqualified if the proposed agreement does not reflect the economic reality of the affected transaction. “During the information-gathering phase, Sars will co-ordinate the gathering of information with the competent authority of the other country, based on the facts and circumstances of each case,” the agency said.“Where practical, functional analysis interviews, site visits and information gathering will be co-ordinated and conducted jointly. Where any information gathering is not conducted jointly, this information must be shared with the relevant competent authority.”
