South African Transfer Pricing

In April 2025, the Tax Court of South Africa delivered a ruling in the case of The Commissioner for SARS v SC (Pty) Ltd, pertaining to the transfer pricing arrangement it has with its cross-border related parties. 

The ruling highlights the importance of the substance of the transaction and people function with a focus on where the real work is being done. 

What was the issue? 

SHL is a JSE listed investment holding company that is headquartered in the Western Cape. It comprises several wholly-owned subsidiaries, including SC (Pty) Ltd (SCL) and SIL. The Group has a substantial retail footprint across 14 African countries and Indian Ocean territories, with over 2,100 outlets serving a broad consumer base across income levels. Its core business is food retailing, supplemented by selected non-food supermarket products.  

Operationally, the group is anchored by two principal subsidiaries, being SCL and SIL. SCL manages domestic operations and SIL oversees offshore interests. SIL is the holding company for the foreign structure. SIL, based in Mauritius, functions as SHL’s international treasury and Intellectual Property (IP) custodian. It owns and licenses the Group’s trademarks to non-South African entities, manages foreign currency flows and facilitates capital injections and loan fundings. Notably, SARS acknowledged that SIL’s offshore positioning had provided commercial advantages, enabling the group to secure transactions and financing that would otherwise be inaccessible under South African exchange control limitations. 

During the period in under review, South African entities within the SHL Group concluded transactions with non-resident connected parties that qualified as affected transactions under section 31 of the Income Tax Act No. 58 (1991). In terms of these agreements, the South African entities rendered administration and procurement services, including the collection of franchise fees and other remuneration due to non-South African Group Companies. They also provided know-how and related IP services to franchisees outside South Africa. However, as a legal owner of all trademarks used by the non-South African subsidiaries, SIL supplied the underlying know-how and set operational standards through franchise agreements. These agreements governed the use of the SHL Group’s international trademarks and established branding standards relating to logos, design, and store layout. These measures were implemented to support business performance in foreign markets, and the SHL Group’s associated brand names carry tangible value in those jurisdictions where the group trades. 

SIL received remuneration of 1% of revenue for the use of the trademark and related services. SCL in turn, received a mere marked-up administrative charge for its activities. In the audit conducted by SARS and through the functional analysis conducted by SARS it became evident that, although SIL was the legal owner of the IP, the relevant underlying Development, Enhancement, Maintenance, Protection and Exploitation (DEMPE) was performed by SCL (i.e., marketing, brand design, store concept and design, strategic directions of the brand etc.) in South Africa.   

Using a benchmark study, SARS found that a comparable arm's length royalty for similar trademark and brand services should range between 3% and 5% of revenue, not 1%. SARS further argued that "SIL did not perform the functions, use the assets or bear risks associated with the DEMPE functions of the intangibles". The purpose of the DEMPE framework, is to ensure that income from intangibles is attributed to the entities that perform these key value-driving activities and assume the associated risks rather than simply to the entity that holds legal ownership.  

SARS adjusted SCL’s taxable income for the 2015 and 2016 years of assessment. For the 2015 year, SARS added R422 528 219 to SCL’s taxable income, resulting in additional tax of R118 307 901. For the 2016 year, the adjustment amounted to R576 780 975, resulting in an additional tax liability of R162 338 673.  

The additional assessments were due to the fact that SARS viewed the royalty not to be arm’s length, and also that SCL did not receive the appropriate remuneration for the functions that it performs. 

Why it matters 

The ruling focuses on a critical element in transfer pricing analysis when it comes to intangibles (IP) and the DEMPE functions. What is stipulated in a legal agreement and who the legal owner is, is no longer sufficient if the actual DEMPE functions differ. SARS is focusing on where the value is being created, where decisions are made, who is taking on the risks, and where real value is created.  

 Key Points to remember 

SARS is focusing on transfer pricing arrangements looking at the functions, risks and assets; they do not rely on intra-group agreements alone. 

Economic analysis (benchmarking) is crucial and should align with the functions, risks and assets being borne by each party to the transaction. 

Group structures should reflect where the real allocation of work is performed and where value is being created. 

Transfer pricing documentation and analysis should not merely support the transaction on paper, but also the practical implementation and pricing analysis according to functions, risks and assets being borne.

Should you require any assistance or have any questions pertaining to transfer pricing please speak to our team of specialists. 

Authors:  

Naledi Ramokgopa, Tax Consultant & Charl Hall, Director