by Monique Fernandes Carvalho (PKF Octagon)

Multinational enterprises (MNEs), which are generally regarded as connected parties and/or associated enterprise located in different jurisdictions. Section 31 of the Income Tax Act requires that MNE's must transact with each other at arm's length prices when transferring goods or services.

The Organisation for Economic Co-operation and Development (OECD) arm's length principle helps MNEs determine transaction prices as if subject to market forces. The transfer prices set for transactions between unconnected persons serve as benchmarks to assess those between connected persons. Discrepancies may lead to potential adjustments and transfer pricing disputes between taxpayers and tax authorities.

To mitigate transfer pricing disputes, the OECD advocates for proactive and transparent discussions between taxpayers and tax authorities. A key mechanism is the use of advance pricing agreements (APAs), serving as a proactive tool to encourage early engagement and prevent disputes. In essence, APAs are formal agreements between taxpayers and tax authorities, facilitating the collaborative establishment of transfer prices for transactions involving connected parties.

Taxpayers dissatisfied with double taxation on a transaction typically follow the dispute process in the relevant tax jurisdiction, followed by applying for the Mutual Agreement Procedure (MAP) or mandatory binding arbitration (where implemented). While these mechanisms address transfer pricing adjustments and document non-compliance reactively, the challenge lies in their limited proactive application. As long as these are the primary and only options available, transfer pricing disputes and double taxation issues remain inevitable. Therefore, it is crucial to develop and implement alternative methods, like APAs, that encourage proactive and upfront engagement between taxpayers and tax authorities to address transfer pricing disputes.

It is noteworthy that South Africa (SA) has recognized the significance of offering taxpayers increased confidence and predictability in managing their tax affairs, as evidenced by the APA program being legislated on 22 December 2023.

The implementation of the APA program in SA is advantageous as it reduces or eliminates regulatory uncertainties for MNEs determining transfer prices on an arm's length basis, aligning with OECD guidelines. This, in turn, diminishes the risk of entities undergoing audits and incurring additional tax liabilities upon reaching an agreement on an arm's length price. Consequently, the APA process enhances SARS efficiency in combating Base Erosion and Profit Shifting (BEPS), allowing more time for implementation efforts rather than focusing on monitoring compliance through audits.

The APA process serves as a driving force for corporate governance, reinforcing governance for MNEs in tax administration. Additionally, it signals their commitment to complying with tax laws and meeting obligations voluntarily. Simultaneously, the process ensures tax authorities receive an equitable share of profits from MNE intra-group transactions, enabling the reallocation of resources to address other tax compliance matters.

In summary, the implementation of the APA program provides mutual benefits for both taxpayers and SARS, significantly reducing the likelihood of future disputes and alleviating the workload and capacity constraints faced by SARS officials.