SARS gets a new weapon

South Africa has introduced an Advance Pricing Agreement (APA) programme, expanding SARS’s ability to monitor and enforce compliance on cross-border transactions.

The Tax Administration Laws Amendment Act, 2023, inserted Part IA into Chapter III of the Income Tax Act, 1962 (the Act), thereby introducing the framework for the APA programme.

As explained by the South African Revenue Service (SARS) and National Treasury, the aim of implementing APAs is to keep up with international trends.

At the same time, it also aims to “provide taxpayers with a greater level of certainty when embarking on large-scale international transactions that have transfer pricing implications.”

The Organisation for Economic Co-operation and Development (OECD) promotes APAs as a key tool to enhance tax certainty and prevent transfer pricing disputes between Multinational Enterprises (MNEs) and tax administrations.

Tax Consulting SA’s Partner and Head of Strategic Engagement & Compliance, Jashwin Baijoo, explained that, from a global business-expansion perspective, MNEs will be most affected.

This is because South Africa’s current transfer pricing framework is informed by the “arm’s length principle”, which serves as the accepted standard for any related party transaction.

This principle outlines South Africa’s general position on transfer pricing and plays a crucial role in determining a taxpayer’s position under the transfer pricing provisions in section 31 of the Act.

As noted in the Explanatory Note, the APA Programme will require scarce resources, Baijoo said. Therefore, it is envisaged that the programme will commence with a pilot phase, accepting only bilateral APA applications initially.

With the initial resources needed for the APA programme now in place, the subordinate legislation has been released for public comment, with comments due by the close of business on 29 May 2026.

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In summary, Baijoo said the APA process commences with an eligible person, being either party to, or contemplating entering into, an “affected transaction”, submitting a “pre-application consultation” to SARS.

They subsequently pay the proposed concomitant consultation fee of R100,000 within seven days of the invoice being issued.

Where SARS has then notified the prospective applicant that they may apply for a Double-Tax Agreement APA, a cost-recovery fee of R1,000,000 must be paid toward the processing of such an application.

SARS will then engage with the “competent authority” of the jurisdiction in which the other party to the “affected transaction” is resident to develop a DTA APA project plan, including the processing stages and key milestones.

If the two authorities reach an agreement on the most acceptable pricing methodology for the transaction and it meets the arm’s-length standard for pricing, the APA becomes valid upon the signatures of all required parties.

The suite of draft subordinate legislative instruments for public comment also includes notices prescribing, among others, the persons eligible to apply for a bilateral APA under a double taxation agreement (DTA).

It also includes the additional grounds upon which an application may be rejected, the procedural and processing requirements applicable to APA applications, and the information required in a preliminary APA application.

Finally, Baijoo noted that it includes the procedures and guidelines governing the implementation and operation of the DTA APA system.

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At a high level, Baijoo said the arm’s-length principle is the international standard by which all commercial or financial dealings between two connected enterprises must be conducted.

“This principle notes that the terms of such transactions should closely resemble those that would have been agreed upon had the contracting parties been independent enterprises,” he said.

“Tax implications must also follow the same principle and accrue as though the enterprises were not connected.” This standard is adopted by all members of the OECD Model Tax Convention, as well as other non-member states.

In practice, the responsibility lies with the taxpayer to demonstrate that the relevant cross-border related-party transaction adheres to the arm’s-length principle and to provide supporting documentation.

“Simply relying on a safe harbour provision does not automatically relieve the taxpayer of this obligation,” Baijoo cautioned.

As there are no “safe harbours” in South African law that exempt a taxpayer from compliance obligations under section 31 of the Act, the introduction of the APA programme is pivotal to align with global tax standards.

Baijoo added that the APA programme pilot aligns well with other OECD member states and with non-OECD countries such as Singapore and Egypt.

“Among the BRICS nations, China and India have both successfully implemented APA legislation. South Africa now follows international trends across the board,” he said.

In practice, this means that SARS must address the scarcity of resources to bolster its transfer pricing capacity, allowing a full rollout subsequent to the conclusion of the pilot, Baijoo noted.

“The insertion of APA rules in our legislative framework is a step in the right direction and may be what South Africa needs to increase international business opportunities,” he said.

With the certainty that the APA programme will provide to both contracting parties and their respective states, it may boost Foreign Direct Investment into an economy in need, furthering the development of infrastructure.