2022 Budget Speech: Transfer Pricing – an opportunity?

By Christian Wiesener, Associate Director at KPMG and Chairperson of the SAICA Transfer Pricing sub-committee

A further increase in state expenditure and the impact of the COVID-19 pandemic that hit the South African economy, require measures to be put in place that will quickly and easily assist the country to navigate from recovery into sustainable economic growth. 

In his State Of The Nation Address on 10 February 2022, President Cyril Ramaphosa announced a focus on encouraging business activity and incentives and support to ramp up economic activity in the country. 

Based on statistics provided, total tax revenue collections for 2020/21 declined by 7.8% to R1 249.7 billion, from R1 355.8 billion collected in the previous year.

The International Monetary Fund has adjusted South Africa’s growth forecast downwards and South Africa needs to react. Investors are clearly back and developing markets, including South Africa, offer unique opportunities at currently relatively low inflation rates, compared to rising inflation rates in some developed markets such as the USA.

Increasing tax rates or reducing tax incentives in an environment where economic growth is of utmost importance would be counterproductive. The government will need to avoid reaching the fiscal cliff (the point when reduced government investment and increased taxes create an imbalance), to avoid losing talent and taxpayers.

Tax proposals 

In 2021, the minister announced significant proposals, including the reduction of the corporate tax rate to 27%, which is high compared to other countries. However, to date, none of the significant tax proposals have been implemented and so there may be some surprises in this year’s budget. 

While often mentioned in relation to tax avoidance, transfer pricing can also be an incentive for investment if rules provide certainty, clarity and double tax relief. Globally, transfer pricing rules and practices have evolved over the past few years. 

After several years of debate and disagreement, the Inclusive Framework (IF) on Base Erosion and Profit Shifting, of which South Africa is one of 140 members, released a statement in October 2021, confirming agreement in respect of a global set of rules designed to: 

1. Ensure the reallocation of profits for large companies to market jurisdictions (Pillar One); and
2. A global minimum taxation regime (Pillar Two).

A tight timeline was set with some of these rules to come in as early as 2023. For South Africa, where only a few of the large multinational groups are headquartered, the main impact will likely be that the income of qualifying groups would be allocated to South Africa. Given South Africa’s importance for trade with the continent and the network of double tax agreements, this could result in more business. Additionally, of the 140 IF members, only three did not sign the statement, two of which are in Africa (Kenya and Nigeria). 

Another area of significant interest relating to transfer pricing concerns Advanced Pricing Arrangements (APAs). An APA is an agreement between a taxpayer and the tax administration regarding what the pricing for a cross-border related party transaction should be. APAs avoid conflict and ensure tax certainty and consistency in many countries. In December 2021, the APA draft legislation, regarding bilateral APAs, was released for comment and SAICA’s Transfer Pricing Subcommittee submitted comments. It is hoped that more clarity regarding the implementation of the APA programme will be provided as this would allay one of the most raised concerns such as tax certainty when it comes to transfer pricing from multinational entities wishing to invest in South Africa and through South Africa. Given that the Pillar One and Pillar Two rules are expected in 2023, the 2022 Budget Speech would be an opportune time to provide clarity on the timing and the extent of South Africa’s APA programme to foreign investors and multinational entities already operating in the country. 

The third area where an announcement could be expected in the Budget Speech relates to non-compliance with transfer pricing documentation rules. Some countries like Tanzania and Zambia impose significant penalties for non-compliance with transfer pricing documentation rules such as late filing. However, South Africa currently only has legislation in place, which applies to multinational entities that are required to file their country-by-country report with SARS. Given the high threshold of R10 billion consolidated group revenue, this rule applies to only a handful of taxpayers, which usually comply due to high statutory audit and tax standards. However, all other taxpayers with transfer pricing arrangements should prepare suitable transfer pricing documentation to be able to defend, if challenged, that the intragroup transactions comply with the law and regulations. Specifically, the law prescribes that taxpayers with cross-border related party transactions (potentially affected transactions) in excess of R100 million prepare and file within twelve months from the end of the year of assessment, with transfer pricing documentation meeting very specific criteria.

At this stage, no penalties exist for non-, or late filing of this documentation, although each document to be filed constitutes a tax return in terms of the Tax Administration Act. Implementing and enforcing a penalty regime in this regard would not only result in increased compliance and likely in increased revenue from correct transfer pricing implementation, but also in penalties from non-compliant taxpayers. It should be noted that the requirement to prepare and file transfer pricing documentation was first applicable for taxpayers in respect of years of assessment commencing on or after 1 October 2016.

It would be interesting to see if there will be any announcements in this year’s Budget Speech relating to the South African APA regime, the introduction of broader penalties, and South Africa’s involvement and any measures to attract investment given the global Organisation for Economic Co-Operation and Development Inclusive Framework Pillar One and Pillar Two initiative.