Transfer pricing is one of SARS’s priority areas for large and multinational businesses. An audit can run for many months and the amounts at stake are often significant, because an adjustment brings additional income tax, a secondary adjustment, penalties and interest. The good news is that most audits are won or lost on preparation. This guide explains how audits work and how to identify and mitigate the risks.
Key points
- SARS selects cases mainly through risk assessment, using ITR14 disclosures, financial statements and CbC data.
- The strongest defence is contemporaneous documentation, signed agreements and a benchmark that matches the facts.
- Respond to information requests fully, consistently and on time.
- The letter of audit findings is the best moment to change SARS’s mind, before an assessment is issued.
- Under the current dispute rules, an objection must be lodged within 80 business days of the assessment.
What triggers a transfer pricing audit?
SARS uses data-driven risk assessment. Common triggers include:
- Losses or very low margins in a South African entity that appears to carry limited risk
- Large management fees, royalties or interest paid to connected persons, particularly in low-tax jurisdictions
- Significant intra-group loans, or loans that are interest-free or carry unusually high rates
- ITR14 answers indicating that transactions are not documented
- Restructurings that move functions, risks or intangibles out of South Africa
Our article on how to identify and mitigate transfer pricing risk looks at each of these in more detail.
How a SARS transfer pricing audit unfolds
1. Information request
SARS usually begins with a request for information: transfer pricing policies, the master file and local file, agreements, financial data and explanations of specific transactions. Treat this as the start of the audit, not a formality. Every answer becomes part of the record.
2. Meetings and site visits
SARS may interview management to understand how the business really operates. This is where differences between the agreements and actual conduct come to light, so prepare the people involved.
3. Letter of audit findings
Before raising an assessment, SARS must set out the outcome of the audit and its grounds, and give you an opportunity to respond, normally within 21 business days. A detailed, evidence-based response at this stage can narrow or eliminate the adjustment.
4. Assessment
If SARS proceeds, it issues an additional assessment. For a company this can include the primary adjustment to taxable income, a secondary adjustment treated as a deemed dividend subject to 20% dividends tax, understatement penalties and interest.
5. Objection, appeal and settlement
You may request reasons for the assessment and must lodge an objection within 80 business days under the dispute resolution rules in force since 10 March 2023. If the objection is disallowed, an appeal must be lodged within 30 business days. Many cases are resolved through alternative dispute resolution or settlement. SARS explains how it deals with late objections and appeals in Interpretation Note 15.
How to prepare before SARS calls
- Document contemporaneously. Prepare the local file and benchmarking before the return is filed, not after an audit starts.
- Align contracts and conduct. Make sure each intercompany agreement reflects what the parties actually do.
- Check the ITR14. Your disclosures must agree with your financial statements and documentation.
- Keep evidence of services. For management fees, keep proof that services were actually rendered and benefited the South African company.
- Know your numbers. Understand where your results sit against the arm’s length range and why.
How to respond well during an audit
- Appoint one coordinator so that answers are consistent.
- Answer what is asked, completely and within the deadline, or request an extension early with reasons.
- Keep a log of everything provided to SARS.
- Challenge factual errors and weak comparables in writing, with evidence.
- Bring in transfer pricing and legal specialists before responding to the letter of audit findings.
Paying while you dispute
South Africa applies a “pay now, argue later” approach: the disputed tax is generally payable unless SARS agrees to suspend payment. A suspension request should be made as early as possible and supported by reasons.
Double taxation and future certainty
An adjustment in South Africa can leave the same profit taxed in two countries. A mutual agreement procedure under the relevant double tax agreement may provide relief. For qualifying groups, SARS’s new advance pricing agreement pilot programme offers a way to agree the approach upfront for future years.
If you have received an information request or a letter of audit findings, early specialist input usually costs far less than an objection. Chantel Venter, who has worked at SARS as well as for taxpayers, provides SARS transfer pricing dispute support at every stage.
Frequently asked questions
How long does a transfer pricing audit take?
It varies widely with complexity and how quickly information is provided. Many take a year or more from the first request to the letter of findings.
How would you identify and mitigate the potential risks in a transfer pricing audit?
Map all connected-party transactions, compare actual results with the arm’s length range, check that agreements and ITR14 disclosures match reality, and fix gaps in documentation and evidence before SARS asks. During the audit, respond consistently and challenge errors with evidence.
Can penalties be reduced?
Understatement penalties depend on the taxpayer’s behaviour. Contemporaneous documentation and a reasonable, well-supported position help show that reasonable care was taken.
