Transfer pricing — the rules governing how related entities within a multinational group price transactions between themselves — has always been one of the more technically complex areas of international tax. The rapid growth of digital business models has made it significantly more complicated.
Why Transfer Pricing Matters for South African Businesses
South Africa's transfer pricing rules, contained in Section 31 of the Income Tax Act, require that cross-border transactions between connected parties be conducted at arm's length — that is, at the price that unrelated parties would agree to in similar circumstances.
SARS has been steadily strengthening its transfer pricing capability, and businesses that cannot demonstrate arm's length pricing are exposed to potential adjustments, penalties, and reputational damage.
The Digital Challenge
Traditional transfer pricing methods were designed for an era of physical goods and clearly identifiable assets. Digital businesses challenge these frameworks in several ways:
Intangible Assets: Software, algorithms, and customer data are often a business's most valuable assets, yet they can be difficult to value using conventional methods.
Remote Participation: A digital business can generate significant revenue in a country without having any physical presence there — a concept that existing tax treaties were not designed to address.
OECD Pillar One and Two: The OECD's two-pillar solution is gradually being implemented across jurisdictions, including South Africa. Pillar Two introduces a global minimum tax of 15% for large multinationals, which will require careful modelling and compliance planning.
How We Can Help
Our tax team has experience in preparing transfer pricing documentation, advising on intercompany pricing policies, and representing clients in dealings with SARS. If your business has cross-border related-party transactions, we encourage you to review your transfer pricing position before year-end.