South African companies that transact with connected persons across the border must be able to show SARS that their prices are arm’s length. How much documentation you need depends mainly on the value of those transactions. This guide sets out the current requirements, the thresholds that trigger them and the practical steps to stay compliant.
Key points
- Section 31 of the Income Tax Act applies to cross-border transactions between connected persons of any value.
- Every company with such transactions must complete the transfer pricing sections of its ITR14 return.
- A master file and local file are required where potentially affected transactions exceed, or are reasonably expected to exceed, R100 million a year in aggregate, without offsetting.
- Detailed transaction-level records are required for individual transactions above R5 million.
- Large multinational groups must also deal with country-by-country (CbC) reporting.
The legal framework
South Africa’s transfer pricing rules are in section 31 of the Income Tax Act. They require “affected transactions”, broadly cross-border transactions between connected persons, to be priced as independent parties would price them. SARS treats the OECD Transfer Pricing Guidelines as its main reference point and has long-standing guidance in Practice Note 7.
The documentation rules sit in the Tax Administration Act. In October 2016 SARS published Public Notice 1334 under section 29, which sets out the transfer pricing records certain taxpayers must keep. A further notice in October 2017, issued under section 25, requires qualifying taxpayers to submit master file, local file and CbC returns.
Who needs a master file and local file?
A South African resident must keep structure and operations records, and submit a master file and local file, if the aggregate of its potentially affected transactions for the year of assessment exceeds, or is reasonably expected to exceed, R100 million. Two details catch people out:
- No offsetting: payments and receipts are added together. A company that buys R60 million of goods from its parent and sells R50 million of services back is at R110 million, not R10 million.
- Reasonable expectation: the test looks forward. If growth will take you over the threshold during the year, plan for documentation from the start.
The master file describes the group as a whole: its structure, business, intangibles, financing and overall transfer pricing policies. The local file focuses on the South African entity and its transactions with connected persons, including the functional analysis, the pricing method and the comparables. Both are submitted within 12 months after the end of the financial year.
Transaction-level records above R5 million
Where the R100 million threshold is met, Public Notice 1334 also requires detailed records for each potentially affected transaction above R5 million. These include the nature and terms of the transaction, copies of the agreements, the functional analysis, the comparable data and methods considered, the reasons for selecting the method, and any adjustments made to align prices with the arm’s length result. Transactions below R5 million remain subject to the general guidance in Practice Note 7.
Country-by-country reporting
CbC reporting applies to large multinational groups that meet the consolidated revenue threshold set in the CbC rules. Where the South African entity is the ultimate parent, it files the CbC report with SARS. South African subsidiaries of foreign groups may need to file a notification identifying the reporting entity. CbC reports give SARS a high-level picture of where the group earns profits and pays tax, and they are used in risk assessment.
What if you are below the R100 million threshold?
Falling below the threshold removes the obligation to file a master file and local file. It does not remove the arm’s length rule. Section 31 has no minimum value and SARS can adjust a price of any size. You still need to answer the transfer pricing questions in the ITR14 correctly and keep records that support those answers. We explain the return in detail in transfer pricing questions on the ITR14: what SARS asks.
For smaller groups, a proportionate approach usually works best: a short transfer pricing policy, signed intercompany agreements and a benchmark for the most material transactions.
How long must records be kept?
Because the record-keeping notice is issued under section 29 of the Tax Administration Act, the general retention rules apply: records must normally be kept for five years from the date the relevant return is submitted, and longer if an audit or objection is under way.
What happens if documentation is missing or weak?
Missing documentation does not automatically mean an adjustment, but it makes an adjustment far more likely and harder to resist. Without your own analysis, SARS can build its own comparables and the burden of proving it wrong rests with you. A transfer pricing adjustment can lead to additional income tax, a secondary adjustment treated as a deemed dividend subject to 20% dividends tax, understatement penalties and interest. Contemporaneous documentation also helps you show that you took reasonable care, which matters when penalties are considered.
A practical compliance checklist
- List every cross-border transaction with connected persons and total them without offsetting.
- Check whether you are, or expect to be, above the R100 million threshold.
- Make sure each material transaction has a signed agreement that matches what happens in practice.
- Update your benchmarking and functional analysis.
- Prepare or roll forward the master file and local file and diarise the 12-month deadline.
- Check that your ITR14 answers agree with your documentation.
If you would like experienced help with any of these steps, Impact prepares master files, local files and ITR14 transfer pricing reviews that are written to stand up in a SARS audit.
Frequently asked questions
Is a local file required for a company with only one large intercompany transaction?
Yes, if that transaction alone, or together with other potentially affected transactions, takes the aggregate above R100 million for the year.
Do domestic transactions between South African group companies count?
Section 31 is aimed at cross-border transactions with connected persons, so purely domestic transactions between South African residents generally fall outside the threshold calculation.
Can we reuse the group’s foreign documentation?
A group master file prepared to the OECD standard can usually be used. The local file must address the South African entity’s own transactions and SARS’s specific record requirements, so foreign local files normally need significant tailoring.
