Sars’s efforts to increase cross-border transfer pricing certainty welcomed

The introduction of an advance pricing agreement (APA) programme in South Africa for cross-border transactions, is widely considered a “giant step” in the right direction, although there are some reservations about key aspects of the programme.

Transfer pricing disputes have been on the rise, resulting in large additional assessments where tax authorities have questioned the transfer pricing methodology used in international transactions.

Read: South Africa gets its first transfer pricing guide

Multinational companies entering large cross-border transactions prefer to have an APA in place for large transactions in order to avoid disputes, audits, additional assessments or even double taxation.

Tax certainty

The main objectives of an APA programme are to ensure transparency, to create tax certainty, and to avoid or eliminate costly and time-consuming transfer pricing audits and tax disputes.

Corneli Espost, director at PwC, says tax certainty remains a key consideration for companies when they invest in a particular country.

A country with an APA programme gives assurance to the investor that their tax affairs will be dealt with efficiently and by well-trained professionals.

There has been some reluctance on the part of the South African Revenue Service (Sars) to introduce an APA programme. However, at the end of 2020 it did release an APA discussion paper.

Towards the end of last year, it published a proposed model and draft legislation for implementation, says April Nicholson, associate director at Graphene Economics.

The implementation date is yet to be confirmed.

Read: The growing concerns around cross-border transfer pricing in Africa

During a panel discussion at a South African Institute of Taxation transfer pricing summit, Nicholson said the Organisation for Economic Cooperation and Development (OECD) released its manual on bilateral advance pricing agreements in September.

“It is intended to give guidance to tax authorities and taxpayers to streamline their bilateral APAs to increase transparency and collaboration.”

The OECD’s in-depth investigation into the efficacy of bilateral APAs resulted in the manual with 29 best practices, says Philip Fouche, associate director at Deloitte. “This is a great opportunity for Sars to link in with international best practice.”

Pilot phase

South Africa will start with a pilot programme that will focus on bilateral APAs (negotiations between Sars and one foreign tax authority), before rolling out the programme to cover unilateral (between the taxpayer and tax authority) and multilateral (between more than two tax authorities) agreements.

The process entails a pre-application consultation which takes place within 60 days of Sars receiving a request for an APA.

Sars must notify the taxpayer within 90 days whether they can proceed to lodge an APA. The APA must be lodged within 60 days. Time is allowed for a revision or withdrawal of the agreement.

Once there is an agreement the applicant can accept, reject or suggest (apparently limited) changes.

This must be done within 60 days after receiving the agreement. Once it is signed by all the parties it becomes effective and is generally valid for five years.

Espost is concerned about the tight timelines for taxpayers to gather the necessary information to complete their applications. Sars can reject an application if, in its view, it does not meet the prescribed requirements.

Read:

Lack of resources

A major challenge for successful implementation is the current lack of resources to deal with an APA programme on a larger scale.

Sars does not have enough people with transfer pricing expertise.

Espost believes the challenges can be overcome by limiting the number of cases allowed into the programme and to ensure cases that are complex in nature and would, without an APA, result in an audit and even end up in a mutual agreement procedure (the procedure that allows tax authorities to resolve international tax disputes) are included.

There are merits in having APAs, says Kananelo Lethena, senior transfer pricing manager at Deloitte. However, he is not overly excited.

“I think I will only get excited if the starting point was unilateral APAs. Once you start talking bilateral APAs I am less confident that it will happen any time soon,” says Lethena.

Carryn Alexander, tax partner at Webber Wentzel, says other African countries have already adopted enabling legislation for APAs, but implementation seems to be the problem.

In South Africa it may take three to four years before our programme is in place.

She attributes implementation challenges to the lack of bargaining power of African countries compared with developed countries, as well as the lack of appropriate skills and expertise. “I just think we should get going and do it.”

She also has some reservations about APAs as much as she believes they would reduce or even eliminate regulatory uncertainty for taxpayers and the tax authority.