Implementation of an advance pricing agreement programme in South Africa
December 2024 | SPECIAL REPORT: CORPORATE TAX
Financier Worldwide Magazine
December 2024 Issue
South Africa has recently introduced legislation to implement an advance pricing agreement (APA) programme consistent with international trends and in keeping with action plan 14 of the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting Action Plan.
The introduction of the APA programme is consistent with the South African Revenue Services’ (SARS’) strategic objective of providing clarity and certainty to taxpayers, which also aims to complement the current advance tax ruling system that applies in South Africa.
SARS has indicated that it will introduce a pilot programme that will initially only accept bilateral APA applications. This will enable SARS to learn from other jurisdictions and to manage the expansion of the transfer pricing (TP) department within SARS. The intention is to expand the APA programme subsequently to multilateral APAs, even though unilateral APAs are not currently envisaged.
It has been indicated that SARS will aim for an APA agreement to be signed within a period of 30 months from the receipt of the complete application by both competent authorities. It is acknowledged that such timeframe may not be met, in which event the competent authorities will continue their discussions or may agree to a reasonable timeframe with the taxpayer within which the agreement may be reached.
Process to obtain an APA
A prospective applicant must request a pre-application consultation meeting with SARS prior to the applicant lodging the formal application. Among others, taxpayers must disclose: (i) the identity and the relationship between parties; (ii) the affected transaction that will form part of the APA; (iii) the most appropriate TP method to apply to the affected transaction; and (iv) whether the taxpayer has consulted with the competent authority of the other country that will be party to the affected transaction.
An APA application will not be considered unless SARS has confirmed that it can be submitted pursuant to the pre-application consultation. SARS will keep the applicant informed on a 90-day basis of the progress made in processing the APA application.
Various fees are payable by the taxpayer in submitting the APA application, including a pre-application consultation fee, an application fee, a cost recovery fee for processing the application, and fees associated with the maintenance or extension of an existing APA.
The duration of an APA
An APA comes into existence if it has been signed by at least two SARS officials delegated to do so.
An APA is applicable for up to a maximum of five consecutive years of assessment commencing on the day after the end of the year of assessment in which the application has been received by SARS.
Once the APA has been signed, SARS must also send the relevant agreement with the competent authority of the other country to which the APA related.
A taxpayer may, no less than 60 days before the end of the last year of assessment during which the APA is in force, request an extension thereof. This may take place for a period not exceeding three consecutive years of assessment commencing on the day after the end of the last of the year of assessment which applied to the APA in the first instance.
A taxpayer may choose to terminate an APA prospectively by informing SARS to that effect.
Equally, SARS may terminate the APA prospectively if: (i) there is an amendment to the legislation on which the APA is based; (ii) there is a change to the agreement in respect of the avoidance of double taxation on which the APA is based; (iii) a court overturns or modifies an interpretation of the legislation on which the APA is based, unless the judgment is under appeal; and (iv) the taxpayer failed to comply with the terms of the APA, including providing a compliance report on an annual basis.
The introduction of the APA programme is welcomed as it may provide certainty for taxpayers. However, it does seem to be a lengthy process which will precede the issuing of the APA in circumstances where the APA is only valid for a period of five years from the date of application submission.
It has been indicated that SARS will be bound by secrecy provisions even though it can obtain external industry experts to assist with the APA process.
It is understood that the APA unit will require independence from the TP auditing team as these sections will have different purposes. However, it has been acknowledged that TP skills are in short supply and SARS may need to draw on these skills from across the organisation, especially in the pilot phase of the APA programme. The distinction that is drawn is that an APA is primarily forward-looking while tax audits are generally historical.
Even though the relevant legislation does not explicitly explain what the process is if an applicant disagrees with SARS’ rejection of an APA application, SARS will engage with a taxpayer before rejecting the application. A taxpayer can also make use of the internal review remedies contained in the legislation if it disagrees with SARS’ decision.
If the taxpayer still disagrees with the outcome, it may submit its tax return on the basis proposed in the application. In such an event, the dispute will be dealt with in the normal course of the dispute resolution process.
Given the success of the voluntary disclosure programme as well as the advance tax ruling application programme in South Africa, the expectation is that the introduction of the APA programme will result in equal benefits.
Emil Brincker is a director at Cliffe Dekker Hofmeyr. He can be contacted on +27 11 562 1063 or by email: emil.brincker@cdhlegal.com.
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Emil Brincker
Cliffe Dekker Hofmeyr