Navigating Section 31: A Business Owner’s Guide to South African Transfer Pricing Compliance

In today’s interconnected global economy, South African businesses frequently transact with international related parties. While these cross-border arrangements are essential for market alignment and growth, they fall squarely under the oversight of the South African Revenue Service (“SARS”) in terms of Section 31 of the Income Tax Act. For business owners, understanding this regulatory framework is no longer optional; it is a critical component of risk management.

Understanding Section 31 and "Affected Transactions"

Section 31 was significantly overhauled in 2012 to shift the focus from mere transaction pricing to the overall economic substance and commercial objectives of an arrangement. The rules apply to "affected transactions," which are broadly defined as any agreement or operation between a resident and a non-resident (among other combinations) who are connected persons or associated enterprises where the terms differ from what independent parties would have agreed upon at arm’s length.

If an affected transaction results in a tax benefit, such as an avoided or reduced South African tax liability, SARS requires a "primary adjustment". This means your taxable income must be recalculated as if the transaction had occurred under arm’s length conditions. Furthermore, for companies, this adjustment is often deemed a dividend in specie, which triggers a secondary tax liability (dividends tax).

South Africa and the OECD Guidelines

South Africa follows the OECD Transfer Pricing Guidelines, which establish the "arm’s length principle" as the international standard. This principle treats members of a multinational enterprise group as separate entities rather than inseparable parts of a single business.

To determine if your pricing is at arm's length, SARS recognises five primary OECD methods: the comparable uncontrolled price (CUP) method, the resale price method, the cost-plus method, the transactional net margin method (TNMM), and the transactional profit split method.

Common Transactions Under Scrutiny

Several types of transactions are frequently reviewed under Section 31, including:

• Sale of Goods: Supplying products to a foreign related party at artificially low prices to shift profit offshore.
• Intra-Group Services: Charging or receiving excessive management or administrative fees.
• Royalties and Licensing: Fees paid for the use of intellectual property, such as patents or trademarks.
• Financial Assistance: Interest on loans and "thin capitalisation" (where a business is funded with a disproportionate amount of debt compared to equity).

Why Benchmarking is Non-Negotiable

Benchmarking is the process of identifying comparable transactions between independent parties to prove your pricing is fair. Under the Tax Administration Act, the burden of proof rests on the taxpayer to show that a valuation is correct or that an amount is deductible. Without robust benchmarking, a business is vulnerable to audits and significant adjustments made by SARS.

Beyond the Figures: Agreements, Obligations, and Risk

It is a common misconception that transfer pricing is only about finding a "benchmark amount." In reality, a proper analysis is built on contracts and conduct. The OECD Guidelines emphasise that the starting point of any analysis is the contractual arrangements, which define the responsibilities, obligations, and rights of each party.

However, transfer pricing is ultimately about the allocation of risk. SARS will look past the "numbers" to see which entity actually performs the functions, uses the assets, and, most importantly, controls and has the financial capacity to assume the risks associated with the transaction. If your written agreements do not align with your actual business conduct, SARS may disregard your characterisation of the transaction entirely.

How We Can Help

Managing cross-border compliance requires a blend of financial benchmarking and legal precision. Benchmarking is important to protect your business from adverse tax and exchange control consequences.Our firm specialises in comprehensive transfer pricing solutions. We offer expert benchmarking for:

• Intra-group services and management fees.
• Royalties and licensing agreements.
• Intra-group loans and arm's length interest rates.

Crucially, we also prepare the necessary intercompany agreements. We ensure that your transfer pricing policy is not just a figure on a spreadsheet, but is supported by robust legal obligations and a clear allocation of risk that reflects the economic reality of your operations.

Feel free to contact the Tax Team to ensure that your international transactions are compliant, defensible, and structured for long-term success.