The transfer pricing compliance conundrum

digital ageAuthor: AJ Jansen van Nieuwenhuizen, Tax Partner, Grant Thornton Johannesburg

By now, most South African taxpayers should be aware that when they enter into transactions with related parties who are not South African taxpayers, such transactions should be concluded on terms and prices that are at arm’s length in nature. The term “arm’s length” essentially indicates a position that two unrelated parties would adopt in an open market transaction, as a willing buyer and willing seller. Critical to managing tax risk for any taxpayer that has transactions of this nature is being able to defend the transfer pricing (TP) position that they have adopted and the only way to adequately do so is through the preparation of TP policy documentation.

What is Transfer Pricing documentation?

As a starting point, it is important to highlight that, for now, it is not a statutory requirement to prepare TP documentation in South Africa – but there is a sting in the tail, and more on that later. Many years ago, SARS issued Practice Note 7 that provided guidance on their approach to TP and what TP documentation should cover.

This Practice Note was largely based on the Organisation for Economic Cooperation and Development’s (OECD) guidelines. In this process, SARS also pointed out that TP documentation should be relevant to each taxpayer’s circumstances and that it was not expected that a taxpayer should spend a disproportionate amount of money of
preparing TP documentation. Unfortunately, many taxpayers have taken a very aggressive position and have compiled a one or two page document that simply states what price they charge their related parties – although this may deal with inter-group pricing, it is not what the OECD and SARS would consider to be a TP document. TP documentation should provide the user (in most cases, SARS or the South African Reserve Bank) with insight into the following:

  • the company and the group it forms part of, what products or services the group sells and some financial and statistical information like revenue, profit, number of employees, key locations etc.
  • the industry the company and group operate in, the regional and global factors that affect that industry, the competitive landscape, etc.
  • the functions that the company undertakes, the various risks it assumes and the assets it uses to perform the said functions
  • the TP methodology that the taxpayer has elected to use in determining and setting its prices and why it has not used any of the other recognised TP methods
  • if appropriate (which in most cases it is), an economic analysis supported by benchmarking studies and analysis, of which the outcome is a pricing range commonly referred to as the inter-quartile arm’s length range.


In the context of what SARS expects to see when a taxpayer says that they have prepared a TP document, when a taxpayer presents a one-pager document to SARS, they arguably compromise their position even further. Critically, a taxpayer needs to discharge the onus of proof on why their pricing is considered to be at arm’s length and merely stating that one thinks that the price is fair does not do so. SARS, and any other revenue authority, will want to see objective data or market information that provides appropriate support. Coming back to the sting in the tail – when submitting an ITR14 tax return, the taxpayer is required to do so on an arm’s length basis. When answering questions relating to related party transactions with non-residents, the taxpayer is asked to confirm whether they have a TP policy document.

If the taxpayer answers “no”, there is an immediate red flag, as SARS will question how the taxpayer knows that the tax return is submitted on an arm’s length basis when he has not prepared TP documentation. By not having adequate documentation or any documentation at all, the taxpayer is immediately on the back foot – a precarious position from which to engage with SARS from! The alternative is to prepare appropriate TP documentation that could also serve to reduce any potential penalties that SARS may wish to impose on the finalisation of any TP audit by SARS. We would be pleased to assist you in navigating the complexities of TP and cross-border trade with related parties. Contact AJ Jansen van Nieuwenhuizen, partner tax services and South African Transfer Pricing leader.