South Africa: Transfer pricing adjustment upheld; no transfer pricing documentation

South Africa: Transfer pricing adjustment upheld

The Tax Court in South Africa upheld a transfer pricing adjustment for a taxpayer that failed to have transfer pricing documentation to support the arm’s length nature of cross-border related-party transactions.


The case identifying information is: ABC (Pty) Ltd v. Commissioner for the South African Revenue Service (IT 14305) [2021] ZATC 1 (7 January 2021).


The taxpayer was involved in the automotive industry, and procured from a foreign connected person precious group metals that were used in the manufacturing of catalytic converters for exhaust systems, which were sold to third-party customers in South Africa.

The taxpayer did not have transfer pricing documentation in place to support the arm’s length nature of the precious group metal purchases during the period under review (FY 2011—which was before amendments were made to the South African transfer pricing legislation). As a result, the South African Revenue Service (SARS) performed its own analysis, using an external database benchmarking search for the identification of independent comparable companies.

SARS selected and applied the Transactional Net Margin Method (TNMM) relying on a Net Cost-Plus as the profit level indicator (full-cost approach) and benchmarked the mark-up on total cost achieved by the taxpayer against the comparable companies determined in the database search. Using this information, SARS concluded that the taxpayer’s margin was between the minimum and the 25th percentile of the weighted average arm’s length range achieved by the comparable companies.

SARS made a transfer pricing adjustment that in turn resulted in the taxpayer’s Net Cost-Plus margin being increased to the median of the weighted average interquartile arm’s length range determined. The taxpayer objected and eventually sought judicial review.

Court’s judgment

In its judgment, the court observed the following:

  • The preparation of robust transfer pricing documentation was critical for a taxpayer to be able to support and defend the arm’s length nature of its cross-border related-party transactions.
  • The income tax return (under the transfer pricing disclosure section) requires a taxpayer to state whether it has transfer pricing documentation to demonstrate the arm’s length nature of the related-party transactions.
  • Under the transfer pricing legislation in effect for FY 2011, the testing of and adjustment in respect of a cross-border controlled transaction were not limited to the price charged, but also required consideration of the profitability achieved by the tested party. [The legislative amendment to section 31 specifically addressed this issue.]
  • A taxpayer electing not to prepare transfer pricing documentation is “at risk” because it is likely that SARS will review the taxpayers transfer pricing position. If in such instances, the taxpayer’s transfer pricing is challenged on the basis of analysis conducted by SARS, the taxpayer effectively gives up its right of documenting and proving the arm’s length nature of its related-party transactions prior to a SARS query.
  • SARS was correct in applying the TNMM (even if there was a potential Comparable Uncontrolled Price (CUP)) because SARS demonstrated that the TNMM was the best suitable method based on the information available. Further, the court found the argument presented by the taxpayer on the CUP appeared to be incomprehensive.
  • SARS appropriately relied on Practice Note 7 and the OECD Transfer Pricing Guidelines in testing the arm’s length nature of a transaction and in making a transfer pricing adjustment. 

KPMG observation

In line with SARS’ focus on transfer pricing compliance and enforcement, taxpayers need to consider reviewing their transfer pricing position, prepare appropriate documentation, and determine that this documentation aligns with actual transactions carried out (both in form and substance). These steps may be particularly important in the context of the coronavirus (COVID-19) pandemic, given its effects on the transfer pricing landscape.

Transfer pricing professionals note that taxpayers cannot use blanket arguments in defending the arm’s length nature of their transfer pricing practices, as this is unlikely to be satisfactory to SARS in proving that taxpayers determined and applied the arm’s length principle from a South African perspective.

Read a February 2021 report [PDF 472 KB] prepared by the KPMG member firm in South Africa

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