New transfer pricing rules for special economic zones

By Hanro Pienaar, Consultant: Transfer Pricing

On 30 July 2026, National Treasury and SARS released the 2026 Draft Taxation Laws Amendment Bill (TLAB) and the 2026 Draft Tax Administration Laws Amendment Bill (TALAB) for public comment, together with the accompanying draft explanatory memoranda. Comments are due by 28 August 2026. For groups operating in, or considering investment into, South Africa’s special economic zones (SEZs), the most important transfer pricing development is the proposed introduction of an arm’s length rule for certain domestic transactions.

The two draft bills are titled as “Second” amendment bills because the Taxation Laws Amendment Act 5 of 2026 and the Tax Administration Laws Amendment Act 4 of 2026 were promulgated on 1 April 2026. As with all draft legislation, these proposals may still be amended, refined or withdrawn during the legislative process. However, the direction of travel is clear: domestic pricing arrangements involving preferential tax regimes are likely to attract closer scrutiny.

Domestic transfer pricing for special economic zones

Section 12R currently provides for a 15 per cent corporate income tax rate for a qualifying company operating in an approved SEZ. Section 12R(4)(c), introduced as an anti-avoidance measure, withdraws that rate where more than 20 per cent of the company’s deductible expenditure or income arises from transactions with a connected South African resident or permanent establishment. National Treasury has acknowledged that this threshold has not always fitted ordinary group structures, including arrangements where manufacturing and marketing functions are housed in separate companies, or where only part of a longer supply chain is located within an SEZ.

Clauses 9 and 14 of the TLAB propose replacing this disqualification rule with a new section 31B. An “affected domestic transaction” would arise between an SEZ qualifying company and a connected resident person that is not a qualifying company where a term or condition differs from what independent parties would have agreed. If a party derives a tax benefit from that difference, its taxable income must be calculated as if arm’s length terms had applied. The proposed rule would apply to years of assessment commencing on or after 1 January 2027.

This would be the first arm’s length rule in the Income Tax Act directed specifically at transactions between two South African residents. Eligibility for the reduced SEZ rate has, until now, been driven largely by a threshold calculation. Under section 31B, it becomes an annual pricing and evidence question, with 12 percentage points at stake between the 15 per cent SEZ rate and the 27 per cent standard corporate income tax rate. The draft explanatory memorandum states that the rule is intended to apply to goods and services, expressly including intra-group services that may shift profits without any physical movement of goods, and to operate in line with the OECD Transfer Pricing Guidelines and the United Nations Practical Manual on Transfer Pricing.

Points requiring clarification

The Bill provides for an adjustment only in the hands of the party deriving the tax benefit. It does not provide a corresponding downward adjustment for the other party, creating a potential risk that the same profit could be taxed twice within South Africa. The draft explanatory memorandum addresses the absence of a secondary adjustment on the basis that inter-company dividends are exempt from dividends tax, but a secondary adjustment and a corresponding adjustment serve different purposes. Comparable African rules, including Botswana’s, deal expressly with corresponding adjustments for domestic transactions.

There is also a difference between the Bill and the draft explanatory memorandum on the identity of the counterparty. The memorandum refers to transactions between resident companies, while the Bill refers to any connected resident “person”. As drafted, the provision may therefore extend to a connected trust, individual or partnership. The Bill also contains no de minimis threshold, which means that a smaller SEZ business could carry the same analytical burden as a large integrated group.

No specific documentation standard is proposed. Public Notice 1334, issued under section 29 of the Tax Administration Act on 28 October 2016, applies to 'potentially affected transactions' defined by reference to section 31, which requires a non-resident party. A section 31B transaction between two residents cannot trigger that notice. Taxpayers may nevertheless face understatement penalties under section 223 of the Tax Administration Act and interest under section 89quat of the Income Tax Act following an adjustment, without a prescribed standard against which their domestic transfer pricing support can be measured.

There would also be no dedicated transfer pricing dispute-prevention mechanism or treaty-based resolution procedure for a section 31B transaction. As this is a wholly domestic matter, any dispute would likely proceed through the ordinary objection and appeal process.

Experience elsewhere in Africa

Botswana is the closest structural comparison. Its domestic transfer pricing rules are generally switched off except where one or both resident parties are an International Financial Services Centre company, taxed at 15 per cent against the 22 per cent standard rate. Its 2019 Regulations deal with corresponding adjustments for domestic transactions separately from international ones. Separately, its BWP 5 million documentation threshold is derived by Commissioner General ruling rather than by amendment to the regulations.

Kenya and Rwanda illustrate how preferential-regime rules can broaden over time. Kenya's section 18A applies to related-party transactions involving preferential regimes, including SEZ and export processing zone entities, and the Finance Act 2022 expanded the definition of a preferential regime beyond designated zones. Rwanda's 2026 rules retain domestic related-party transactions within scope and apply to certain dealings with beneficial tax regimes irrespective of whether the parties are related.

Several other regimes have had to answer the same practical questions. Mozambique requires a corresponding adjustment in the other domestic taxpayer where one taxpayer’s profits are corrected. Ghana and Tanzania use documentation thresholds, while Ghana also provides a simplified approach and safe-harbour ranges. Zimbabwe requires disclosure of domestic related-party dealings in its transfer pricing return. Tanzania permits a tested party outside the jurisdiction if the relevant information, including financial statements, is made available. What these regimes have in common is that the domestic rule did not arrive on its own: each is paired with a documentation threshold, a disclosure mechanism, a simplified approach, or a stated position on comparables.

Practical implications

Affected groups should start by mapping all domestic connected-party transactions into and out of their SEZ entities. Particular attention should be given to intra-group services, cost allocation keys, benefit evidence and the mark-ups applied to shared costs. Existing agreements and transfer pricing policies may not cover domestic dealings because both parties have historically fallen outside section 31. From a governance perspective, tax teams should also consider whether finance, operations and procurement teams understand that domestic arrangements may now need the same level of pricing discipline as cross-border transactions.

The repeal of section 12R(4)(c) may also create an opportunity. Groups previously disqualified by the 20 per cent threshold, or deterred from locating part of a supply chain in an SEZ, may be able to access the 15 per cent rate provided their pricing can be supported. For readers, the key message is that this proposal should not be viewed only as a compliance change. It is also a prompt to reassess SEZ operating models, domestic service flows, internal charging policies and the quality of transfer pricing evidence before the rules take effect. Early review should place taxpayers in a stronger position both to manage risk and to identify opportunities that may have been constrained under the current threshold-based regime