Article by: Disebo Makhetha

Senior Manager: Transfer Pricing

 

 

An advance pricing arrangement (APA) as defined in the OECD as an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria including the following for the determination of the transfer pricing for those transactions over a fixed period of time:

Transfer pricing method

Appropriate comparables

Appropriate adjustments

Critical assumptions as to future events

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Among others, the definition illustrates that an APA is entered (1) in advance and (2) for a fixed period (3) based on an appropriate set of criteria. APAs ensures transfer pricing certainty so MNEs can anticipate the tax consequences of the transactions that they enter into and can assist MNEs avoid incurring penalties for not complying with certain requirements. On the other hand, APAs are cumbersome and take longer to complete and which requires capacity from revenue authorities.

The APA process is formally initiated by a taxpayer and requires negotiations between the taxpayer, one or more associated enterprises, and one or more tax administrations. APAs are meant to resolve transfer pricing issues as they are intended to supplement the traditional administrative, judicial, and treaty mechanisms.

South Africa, as a member of the OECD’s Inclusive Framework on BEPS, has adopted some BEPS Actions plan recommendations. For instance, South Africa is a signatory to the Multilateral Instrument (MLI) and has enacted domestic regulations in relation to transfer pricing documentation requirements.

Action 14 of the BEPS Action Plan aims to ensure the timely, effective and efficient resolution of treaty-related disputes and recommends that countries should implement bilateral APAs as soon as they have the capacity to do so. The Action plan recognizes that APAs provide a greater level of certainty in both treaty partner jurisdictions, lessen the likelihood of double taxation and may proactively prevent transfer pricing disputes.

The South African Revenue Services (SARS) Practice Note 7, dated 6 August 1999 stated that due to various factors, the APA process would not in the foreseeable future, be made available to South African taxpayers. To promote tax certainty in South Africa, an advance tax ruling (ATR) system was implemented in 2006. However, an application for an advance tax ruling in relation to the pricing of goods supplied or services rendered to a connected person (transfer pricing) is not properly catered for. The Davis Tax Committee recommended the introduction of an APA program in South Africa and as a result, a discussion paper dealing with the APA program was issued by SARS for comment in November 2020.

The discussion paper states that SARS is not ready to implement an APA system at this point in time, as it is still busy with building transfer pricing capacity. However, the aim is to start with the planning and the drafting of the legislation for a bilateral APA system.

It is expected that it will take a few years to implement an APA system. Further, APA legislation will require the prior approval of the National Treasury and the Minister of Finance. Noting that transfer pricing audits hardly reach the courts in South Africa as many such cases are settled outside of court, there is limited guidance available for taxpayers engaged in transfer pricing transactions. It is therefore in the interest of both the taxpayers and SARS that the APA process is started as soon as is practical.

References

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  1. OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017. Available from: https://read.oecd-ilibrary.org/taxation/oecd-transfer-pricing-guidelines-for-multinational-enterprises-and-tax-administrations-2017_tpg-2017-en#page1 Accessed on 18/05/2021.
  2. SARS Discussion Paper. Advance Pricing Agreements. Available from: https://www.sars.gov.za/wp-content/uploads/Legal/DiscPapers/LPrep-DP-2020-02-Discussion-Paper-on-Advance-Pricing-Agreements.pdf. Accessed on: 19/05/2021.
  3. OECD/G20 Base Erosion and Profit Shifting Project. Making Dispute Resolution Mechanisms More Effective, Action 14 - 2015 Final Report. Available from: https://read.oecd-ilibrary.org/taxation/making-dispute-resolution-mechanisms-more-effective-action-14-2015-final-report_9789264241633-en#page9. Accessed on: 19/05/2021.
  4. THE REPUBLIC OF SOUTH AFRICA. SOUTH AFRICAN REVENUE SERVICE. PRACTICE NOTE NO. 7- SECTION 31 OF THE INCOME-TAX ACT, 1962 (the Act) : DETERMINATION OF THE TAXABLE INCOME OF CERTAIN PERSONS FROM INTERNATIONAL TRANSACTIONS: TRANSFER PRICING. Available from: https://www.sars.gov.za/wp-content/uploads/Legal/Notes/LAPD-IntR-PrN-2012-11-Income-Tax-Practice-Note-7-of-1999.pdf. Accessed on 19/05/2021.