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Deloitte SA 2015/16 Budget

Prospects for a South African APA system

A valuable mechanism often used by taxpayers internationally to obtain certainty on transfer pricing (TP) matters is the advance pricing agreement (APA) system. However, the SA Revenue Service (SARS) has not, as yet, had any form of an APA system and rulings on the issue are also not available.

Prospects for a South African APA system

A valuable mechanism often used by taxpayers internationally to obtain certainty on transfer pricing (TP) matters is the advance pricing agreement (APA) system. However, the SA Revenue Service (SARS) has not, as yet, had any form of an APA system and rulings on the issue are also not available.

TP matters are expressly excluded from the advance tax ruling system. However, there has been talk, for some years, of South Africa implementing APA’s. The main inhibiting factor is the administrative and technical capacity of SARS to implement and maintain such a system.

We will therefore be watching to see whether there are any indications in the forthcoming Budget Speech that the introduction of such a system is imminent.

The way APA’s work is that a multi-national enterprise (MNE) would approach the authorities in two or more countries to engage with each other and attempt to reach agreement regarding the pricing of a major transaction (or possibly more than one transaction) affecting the MNE. Assuming that an APA is then successfully concluded, it would apply between the relevant authorities for an agreed period (e.g. three or five years). This gives the MNE certainty that the transaction in question will not be challenged, for TP purposes, in either country for the agreed period.

Obtaining APA’s is generally a time consuming and expensive process. However, MNE’s consider the investment to be worthwhile because the cost and disruption associated with TP disputes is generally significantly greater.

The classic form of APA is between the revenue authorities of two countries (bi-lateral APA’s) or even three or more countries (multilateral APA’s). There is a lesser form of APA – a unilateral APA – which applies only within a single country. In this case the agreement is between the taxpayer and the revenue authority. In essence, this is a form of tax ruling.

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