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South Africa: Tax authority to use transfer pricing risk profiling to verify compliance

South Africa: Transfer pricing risk profiling

The Commissioner for the South African Revenue Service (SARS) focused on transfer pricing in a late February 2020 media release concerning tax compliance.

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Transfer pricing was specifically mentioned as an area of major concern because:

 …some [multinational enterprises] engage in aggressive  tax planning to create a disconnect between the local activities which give rise to profits and then declare these profits in tax jurisdiction with lower tax rates…. [S]ignificant revenue leaves South Africa every year in the form of intra-group services linked to multinational enterprises.

Intra-group services rendered to a South African member of a multinational may be considered problematic when the services do not create a benefit for the recipient. This can occur, for example, when:

  • An independent third party would not have paid for similar services
  • The fees allocated to the South African group company were not commensurate with the services provided
  • The profit element charged was not arm’s length

The SARS release further indicates that transfer pricing risk profiling will be one of the measures to identify and address non-compliance with South African transfer pricing laws. Once an increased transfer pricing risk is identified and an initial request for information issued, the selection of cases for in-depth audit and possible criminal action against taxpayers could follow. The Commissioner concluded that, when warranted, SARS may even go as far as to reverse service charges if the multinational group fails to provide information to support the claims.


KPMG observation

Tax professionals in South Africa are aware that since the beginning of 2020, SARS has been requesting from taxpayers records relating to intra-group services received by a South African member of a multinational group. In light of the renewed focus on transfer pricing in South Africa, taxpayers need to understand their potential transfer pricing risk and in particular by:

  • Identifying all intercompany agreements
  • Determining whether sufficient documentation exists to support the pricing of those transactions
  • Analysing the pricing of undocumented transactions (if relevant)
  • Quantifying the potential exposure related to documented and undocumented transactions


Read a March 2020 report [PDF 562 KB] prepared by the KPMG member firm in South Africa

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