Introduction of Advanced Pricing Agreements in South Africa – how will they be implemented?

Introduction of Advanced Pricing Agreements in South Africa By NTEBOGENG MAPALETSEBE

The South African National Treasury, in its 2023 draft Taxation Laws Amendment Bill (TLAB), proposed the introduction of an Advanced Pricing Agreement (APA) programme, which seeks to enhance transfer pricing (TP) clarity and certainty for taxpayers. The TLAB outlines the legislative framework for APAs and the associated processes to be followed when entering into APAs.

APAs are agreements that determine, in advance, an appropriate set of criteria (e.g., TP method to be used, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the TP for those controlled transactions over a fixed period.

The persons eligible to apply for an APA programme, as well as the prescribed fees, will be those prescribed by the Commissioner through a Public Notice. The fees may include the pre-application consultation fee, application fee, cost recovery fee and fees associated with the maintenance or extension of an existing agreement, etc.

Proposed APA Programme

The proposed APA programme is structured into several stages, each designed to ensure a thorough and comprehensive evaluation of TP arrangements:

Pre-application consultation stage – 

• Taxpayers initiate the process by requesting a pre-application consultation together with the proof of payment for the consultation; and
• The pre-application consultation meeting must cover, among other things, the scope of the APA, the parties involved, the relationship between the parties involved and their countries of residence, management structures and all the other information pertaining to the affected transaction (i.e., TP method, value of the transactions etc.).

Application stage –

• A prospective applicant must submit an APA application within 90 days from the receipt of the notification from the Commissioner. Where there is more than one applicant, the applicants must prepare a joint application and appoint one representative for the application;
• The application must include the names, contact details, tax reference number and country of residence details of each applicant;
• All the information and supporting documents that could potentially affect the APA to be also included, i.e., annual financial statements, forecasts, business plans the scope of the industry the applicant operates in, affected transaction that will form part of the APA, critical assumptions to be made, TP method(s), the arm’s length price, any adjustment applicable etc.;
• Any past and current tax audits in respect of the affected transactions, either in the Republic of South Africa or elsewhere, must also be mentioned;
• The views from the competent tax authority of the other country being a party to the affected transaction must also be included; and
• The expected duration of the APA must be clearly specified but not exceeding the applicable years of a maximum of five (5) consecutive years or the period allowed by the Commissioner i.e., three (3) years.

Amendments to the application –

• An applicant may request to make an amendment to the APA application within 60 days from submitting the application and the Commissioner may allow the amendment for as long it does not materially alter the nature of the original application.

Withdrawal of the application –

• The applicant may withdraw an application provided the Commissioner has not processed the application of the APA, but the applicant will be liable for the applicable fees

Rejection of the application –

• The Commissioner will reject an APA application should it not meet the requirements as prescribed in the legislation.

Processing of the application –

• The Commissioner will inform the applicant within 90 days after accepting the APA application and process it in a notice that sets the terms and conditions under which the application will be considered; and
• The Commissioner will then prepare a preliminary APA agreement which will include all the necessary information pertaining to the APA.

Finalisation of the APA – 

• Should the applicant accept the preliminary agreement, the applicant must sign and return it to the Commissioner together with at least two South African Revenue Services (SARS) officials delegated to do so and the competent authority of the Republic of South Africa; and
• The APA will be applicable for up to a maximum of five (5) consecutive years of assessment from the day after the end of the year the APA application was received by the Commissioner.

Compliance report –

• The applicant must submit to the Commissioner for each of the years of assessment a compliance report which will include confirmation that the information provided in the APA has not changed since submitting the application; and
• The transaction pertaining to the APA and confirmation as well as the demonstration of compliance to terms and conditions of the APA.

Extension of the APA – 

• An applicant may request for an APA extension not less than 60 days before the end of the of the last years of assessment, however, the Commissioner may reject the request for extension if its not in a prescribed manner and require the applicant to submit a new APA application.

Termination of an APA –

• A party to an APA may choose to terminate an APA by informing the other parties of the APA with reasons for the termination; and
• The Commissioner may also choose to terminate an APA for different reasons, i.e., a change in the legislation which may affect the APA, failure to comply etc.

Graphene Economics perspective

As Graphene Economics, we welcome the proposed introduction of APAs by SARS. We believe there are various important considerations to be addressed to ensure the successful implementation of the APA programme. These include:

• Issuing a detailed public notice/interpretation note that provides further guidance/detail with respect to the APA process (e.g. with respect to the complexity of transactions and the interplay with ongoing TP audits);
• Providing information to companies on how much the whole application process will cost and how long it will take SARS to respond to their APA applications;
• The capacity of SARS to ensure that separate teams are able to work on the APAs compared to the SARS teams working on transfer pricing audits. This will be critical to ensure trust in the programme.

Source: https://www.treasury.gov.za/public%20comments/TLAB%20and%20TALAB.pdf

 

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