To be [associated] or not to be? That is the question - though not for Hamlet in this instance, but for taxpayers resident in South Africa, as well as foreign companies with a South African presence. After a couple of years of implementation delays, from 1 January 2023 South African Revenue Service (SARS) will formally introduce the concept of associated enterprises into South African transfer pricing regulations. The current definition of connected person will remain intact. The introduction of associated enterprises will widen the transfer pricing “net.” The changes will pertain to years of assessment starting on or after 1 January 2023.
To provide guidance on determining whether one fits the definition of associated enterprises, SARS published a draft interpretation note (IN) on 14 October 2022. The IN acknowledges that the current transfer pricing rules, based solely on the connected party definition, may not always capture arrangements between associated enterprises, where, by virtue of the association, there is significant influence over the determination of transfer prices. To correct for this, and to bring the legislation in line with international standards, the term associated enterprise, as contemplated in Article 9(1), has been inserted into the South African transfer pricing rules.
The IN does not define the term itself, but rather refers to Article 9. This very wide definition states that two enterprises are associated enterprise where:
- An enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or
- The same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State.
Various stakeholders have provided the feedback to SARS that applying associated enterprises in the current format is too broad and should be defined specifically. Yet, no additional guidance appears on the horizon and taxpayers must prepare for 1 January 2023.
Taxpayers must consider whether they fall into this wider South African transfer pricing net. Related party arrangements in any of the following circumstances may result in additional transfer pricing compliance requirements:
- Between entities with direct or indirect participation in management
- Between entities where there is direct or indirect control
- Between entities with direct or indirect participation in capital
- -Between a South African head office and its foreign branch or vice versa (i.e. the same legal entity)
- Economic dependency exists between parties that would not “normally” exist between independent parties transacting at arm’s length
To bring it back to Shakespeare, rather than revert into a melancholic soliloquy on your company’s existential status in this complex transfer pricing world, we simply recommend that multinational enterprises with a South African presence review their cross-border arrangements to confirm whether the amended rules apply to such arrangements and entities not previously captured. Relevant transfer pricing compliance requirements (e.g. filing of transfer pricing documentation) can then be considered accordingly.
Our South African transfer pricing experts are ready to assist you with these new rules. Please contact us.