South Africa has recognised the importance of offering taxpayers greater certainty and predictability in their tax affairs through the recently proposed Advance Pricing Agreement ("APA") programme. On 31 July 2023, the National Treasury released draft legislation for a proposed APA Programme through the Draft Tax Administration Laws Amendment Bill, 2023 ("Draft TALAB"). This draft bill includes a clause indicating that a chapter on the APA programme will be inserted into the Income Tax Act, 1962 ("the SA Income Tax Act"). It follows the release of a draft public discussion paper on the introduction of an APA programme, released in 2020 and the South African Revenue Service's ("SARS'") model draft legislative framework, released in 2021.

The introduction of the APA programme is a positive and significant development in South Africa's efforts to enhance its tax administration system. It provides taxpayers with an alternative and binding arrangement with SARS, and it will also offer upfront certainty on transfer pricing positions for a defined period.

In an effort to further develop and refine the model, a pilot APA project is planned, which will only accept bilateral APA applications; this should allow the SARS APA unit to learn from other countries and expand capacity before considering multilateral APA applications. The release of the National Treasury's response document, which was due by 31 August 2023, is eagerly awaited.

What is an APA?

An APA is an agreement between a taxpayer and a tax authority (e.g. SARS) in terms of which the transfer pricing methodology for the pricing of a taxpayer's cross-border related party transactions is determined in advance, i.e. for future years.

APAs are voluntary agreements, which means that taxpayers can choose to enter into them with tax authorities and are legally binding agreements between the taxpayer and the tax authority.

Transfer pricing continues to be a significant income tax issue facing many multinational groups worldwide. As tax authorities seek to ensure that transactions are conducted at arm's length, companies engaging in international operations often face heightened transfer pricing scrutiny and the risk of double taxation.

With growing transfer pricing disputes involving tax authorities, the use of APAs is on the rise. APAs offer a way to attain certainty by enabling taxpayers to proactively negotiate with tax authorities to establish the right transfer pricing methods for their transactions.

The purpose

The primary goal of APAs is to:

  • Prevent and resolve potential transfer pricing disputes,
  • Promote fairness, and
  • Provide greater certainty to taxpayers regarding their transfer pricing obligations.

APAs enable tax authorities and taxpayers to collaborate and ultimately agree on the appropriate transfer pricing methodologies.

Understanding the South African APA framework

The proposed legislation deals with crucial aspects such as:

  • Clarifying who is eligible to apply for APAs,
  • Applicable fees,
  • Pre-application consultation meeting and what it entails,
  • Application processing procedures,
  • Amendments to the APA application, and
  • Withdrawal or rejection of an APA application.

And further sets out:

  • Processing and finalisation of an APA application,
  • Submission of compliance reports, and
  • Extension and termination of approved APAs and record retention.

The Commissioner may, by public notice, specify procedures and guidelines for the implementation and operation of the APA system.

The APA programme will only enter into effect on a date to be announced by the Minister in the Government Gazette, and it is not clear when this will be.

Taxpayer benefits

The introduction of the APA programme will bring numerous benefits for taxpayers engaged in cross-border transactions:

  • Certainty: APAs provide taxpayers with a clear understanding of how their inter-company transactions will be treated for tax purposes.
  • Conflict avoidance: By agreeing to certain transfer pricing methodologies in advance, APAs help prevent transfer pricing disputes and potential audits. This can save both taxpayers and tax authorities time and resources that would otherwise be spent on resolving conflicts.
  • Customisation: APAs are tailored to the specific circumstances of taxpayers and their inter-company transactions. This means that the agreed-upon methods are designed to reflect the unique economic realities of the taxpayer's business.
  • Double taxation avoidance: APAs often involve bilateral or multilateral agreements with multiple tax authorities. This helps prevent the issue of double taxation, where the same income is taxed in more than one country.
  • Enhanced collaboration: APAs encourage collaboration between taxpayers and tax authorities. This cooperative approach fosters a better understanding of complex transfer pricing arrangements and helps build trust between the two parties.
  • Enhanced reputation: The implementation of an APA programme can enhance a country's reputation within the global business environment. Overall, a positive reputation can encourage businesses to invest in South Africa and foster goodwill among international partners.
  • Long-term benefits: APAs typically have a multi-year duration, often three to five years or more. This long-term perspective provides stability for taxpayers, allowing them to make strategic decisions with confidence.
  • Reduced compliance burden: With an APA in place, taxpayers can often streamline their transfer pricing documentation and reporting requirements. They can rely on the agreed-upon methodology, reducing the need for extensive record-keeping and documentation efforts.

All these factors contribute to a more stable and predictable tax environment, which can benefit both businesses and the government. Overall, a well-implemented APA programme can help improve South Africa's tax administration and create a favourable environment for economic growth and investment.

Challenges faced

It is important to note that while APAs offer numerous benefits, they also involve a detailed, often time-consuming and costly negotiation process. Taxpayers considering APAs should be prepared to invest resources in the application and negotiation stages. Additionally, it's essential to maintain compliance with the terms of the APA throughout its duration to fully realize the benefits.

One of the biggest challenges faced in South Africa relates to the scarcity of transfer pricing expertise in the country, which will require resources and time to develop at SARS. Although the APA unit will require independence from the transfer pricing unit, it is envisaged that in the APA unit's early stages of development the relationship between the units will be relatively fluid, resulting in the exchange of expertise and personnel between the units.

Conclusion

The proposed APA programme in South Africa has the potential to significantly enhance the country's tax landscape and promote tax certainty, as well as international business growth, compliance, and transparency. It is seen as a progressive initiative that can benefit various stakeholders and pave the way for improved tax planning and transfer pricing strategies within the country.

Reviewed by Peter Dachs, Head of Department for ENS' Tax practice

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.