Intercompany transactions: An overlooked tax risk in M&A

Within the broader tax risk landscape, intercompany transactions, including for example cross‑charges, recharges, services, sales of goods, financing arrangements, present a particularly challenging and closely scrutinised (by the tax authorities) area. In the context of an acquisition, they can materially alter the tax risk profile of the target. READ MORE 

Why intercompany transactions are often overlooked 

Perception that intragroup transactions "wash out" at group level 

A general misconception with many organisations is that, because intercompany transactions are eliminated during group consolidation, they pose little tax risk. However, assessment of these transactions is made on a legal entity basis by the tax authority, not on consolidated accounts. If pricing is not arm’s length or documentation is inadequate, SARS may impose adjustments, penalties, and interest, even if the transactions have no impact on group profit. While transfer pricing tax rules will generally find application to most cross border intercompany transactions and these usually have associated documentary tax compliance requirements, even local company-to-company transactions can lead to tax risk where for example a loss-making company charges excessive fees to a profit-making company to ‘shift’ tax deductions so as to achieve a more favourable overall tax outcome, or where a local company borrows monies at interest but on-lends these funds to another local company at no or very low interest. There are many other examples. 

Complexity and lack of documentation 

Intercompany arrangements may be informal, lacking any documentation or poorly documented, or inconsistent across group entities. Ensuring that such transactions are conducted at arm’s length and properly documented is critical to avoiding disputes with tax authorities.  

Scope gaps in due diligence 

Buyers may assume the due diligence team has covered intercompany matters, yet these are often outside the agreed-upon scope unless specifically requested. This disconnect can lead to potential exposures not identified early enough to influence deal structure, pricing, or SPA protections. 

Transfer Pricing 

There are common tax risks which are typically identified during a tax due diligence review. These can be summarised as follows  

Improper pricing of goods, services, intellectual property licences, royalty arrangements, or management fees which can trigger SARS imposed transfer pricing adjustments to align the transaction with arm’s‑length principles. Such adjustments may result in the denial of deductions and result in the imposition of additional tax liabilities, penalties, and interest. 

Intra‑group financing remains a significant risk area, particularly where loan agreements stipulate that interest is charged but the rate applied is not market‑related or commercially reasonable or does not clearly state repayment terms. These arrangements are often managed informally, with limited documentation and insufficient commercial rationale to support the underlying transaction. 

Shared finance teams, HR support, IT functions, and management services are not always reviewed to ensure that such costs are priced on an arm’s-length basis and supported by proper documentation and commercial rationale. SARS may challenge such deductions or deny cost allocations altogether should they appear excessive in nature. 

Conclusion 

Intercompany transactions may not always draw immediate attention during a tax due diligence review, but they carry some of the most material and complex tax risks. A buyer inherits all tax exposures of the acquired company, including historic intercompany issues. Failing to review these carefully can leave buyers exposed to disputes, penalties, and post‑deal liabilities.  

Ensuring that intercompany arrangements are systematically incorporated into every tax due diligence, supported by comprehensive documentation, clear quantification of potential exposures where applicable, and demonstrable alignment with South African tax legislation, enables both buyers and sellers to mitigate risks, preserve value, and facilitate a more efficient and predictable transaction process. 

Author 

 Michelle Nyamupingidza, Manager