Transfer Pricing 101: Documentary requirements

Transfer pricing documentation is required in South Africa to support the arm’s length nature of cross-border related party transactions. This article outlines the key documentation requirements under South African transfer pricing regulations, and highlights practical considerations for ensuring compliance. READ MORE

In South Africa, the South African Revenue Service (SARS) has adopted a rigorous approach to transfer pricing documentation, requiring taxpayers to substantiate the arm’s length nature of their related party transactions. This is particularly relevant for entities engaged in cross-border dealings with related parties.

South Africa’s local Transfer Pricing Regulations are embedded within section 31 of the Income Tax Act and are operationalised through Practice Note 7. ¹Additionally, to align with international best practices and enhance transparency, South Africa follows the OECD’s three-tiered documentation framework comprising the Country-by-Country Report (CbCR), Master File, and Local File. These components collectively aim to provide a comprehensive view of a multinational group’s global operations, transfer pricing policies, and the local entity’s specific intercompany transactions. Clarifying how these local rules fit into the broader OECD framework is essential for understanding the full scope of South African transfer pricing obligations.

CbCR

The CbCR is a strategic summary report. It provides jurisdiction-specific data on the MNE Group’s revenue, profits, taxes paid, and economic activity.

In South Africa, the obligation to file a CbCR applies to MNE groups where the Ultimate Parent Entity (UPE) is a South African tax resident and the groups consolidated revenue is Euro 750 million or more in the preceding fiscal year. This is a ZAR equivalent of R10 billion (adjusted by currency fluctuations).

This threshold is assessed annually at the MNE Group level, based on consolidated financial statements prepared in accordance with applicable accounting standards.

Where the criteria is met, a CbCR must be submitted electronically via SARS’ dedicated platform using the OECD XML Schema v2.0 to ensure consistency and compatibility across jurisdictions.

Where an SA entity is not the UPE but forms part of an MNE Group, the constituent entities within South Africa may have notification obligations. These notifications confirm the identity and jurisdiction of the reporting entity and must be disclosed in the annual corporate income tax return.

Master File

The Master File is a group-level report that provides a consolidated overview of the MNE Group’s global operations. The Master File provides a high-level view of the MNE Group’s global operations, transfer pricing policies, and allocation of income and functions.

In South Africa, the requirement to prepare a Master File applies where the UPE is a South African tax resident and the MNE Group’s consolidated revenue is Euro 750 million or more in the preceding fiscal year. This is a ZAR equivalent of R10 billion (adjusted by currency fluctuations).

In addition, any MNE entity which is not required to file a CbCR but has an UPE which is a South African tax resident with cross-border related party transactions which exceeds or is expected to exceed R100 million in aggregate, must prepare a Master File .

Where an entity satisfies the criteria, the Master File has to be prepared on an annual basis and submitted with the corporate income tax return.

Local file

The Local File is an entity-level report that documents the South African taxpayer’s specific intercompany transactions with related parties. The Local File must include a comparability analysis for each material controlled transaction supported by a functional analysis, method selection, and benchmarking to demonstrate arm’s length compliance.

The Local File is required where the South African entity has cross-border related party transactions exceeding or reasonably expected to exceed R100 million in aggregate. The quantum of the related party transactions is determined on a gross basis, and includes capital balances of funding arrangements, interest, purchases and sales, administrative and management services.

In addition, each cross-border related party transaction must be evaluated separately and where transactions exceed R5 million, additional information (to be kept on hand an provided in an audit or transfer pricing review) is required for each transaction exceeding R5million. This requirement is prescribed in Government Gazette No. 40357, published on 20 October 2016, which contains SARS’s Public Notice 210 issued under Section 31(1)(b) of the Income Tax Act.

The evaluation must be performed annually, and where threshold is exceeded, the Local File must be submitted to SARS together with the corporate income tax return.

What happens if you are below the mandatory threshold?

Although the transfer pricing legislation and regulations are silent as to the documentary requirements for entities with cross-border related party transactions with an aggregate value below R100 million, the onus of proof is on the taxpayer to prove that transfer prices are at arm’s length. In these instances, a simplified evaluation of transactions are recommended for MNE Groups.

What’s next?

If your business engages in cross-border transactions with related parties, now is the time to take transfer pricing compliance seriously. Transactions and their values should be reviewed to establish whether mandatory reporting requirements have been met.

Even if you fall below the mandatory thresholds, it is wise to:

• Maintain internal documentation;
• Apply a clear pricing rationale;
• Ensure intercompany agreements are up to date and reflect the economic substance of the transactions;
• Regularly review transfer pricing policies.

Proactive compliance can assist MNEs with avoiding costly transfer pricng adjustments, penalties, and reputational risk.

¹_{The following legislation and regulations are considered when preparing a Local File: Section 31 of the Income Tax Act. No. 58 of 1962, SARS Practice Note 7 dated 6 August 1999, SARS Addendum to Practice Note 7 dated 29 September 2005, Government Gazette 1334 issued in respect of documentation retention dated 28 October 2016, Government Gazette 1117 issued in respect of Country-by-Country Reporting, Master File and Local File dated 20 October 2017, SARS External Business Reporting Requirement Specification document dated 20 November 2022, SARS Interpretation Note 127 dated 17 January 2023 and SARS Interpretation Note 128 dated 17 April 2023.}

Authors:

Charl Hall, Transfer Pricing Director at Forvis Mazars

Nadine Smit, Transfer Pricing Manager at Forvis Mazars

Pinky Nkone, Transfer Pricing Consultant at Forvis Mazars