Transfer pricing risk is the chance that SARS, or another tax authority, adjusts the prices between your group companies, and the cost if it does. For South African companies that cost can include additional income tax at 27%, a secondary adjustment taxed as a deemed dividend at 20%, understatement penalties and interest. The good news is that the risk areas are well known, so they can be identified and managed.
Key points
- Most risk sits in a handful of transaction types: loans, management fees, royalties and distribution or manufacturing margins.
- Inconsistency between agreements, actual conduct and ITR14 disclosures is a major risk in itself.
- A structured review ranks issues by likelihood and impact so you fix the important ones first.
Common transfer pricing risks in South Africa
Intra-group loans
SARS looks at both the amount of debt and the interest rate. Excessive debt, interest-free loans and rates that do not reflect the borrower’s credit standing are frequent issues. See intra-group loans under Interpretation Note 127.
Management fees and intra-group services
SARS asks whether the services were actually provided, whether they benefited the South African company and whether the charge is arm’s length. Shareholder activities and duplicated services should not be charged. Our guide to management fees and intra-group services covers the evidence you need.
Procurement and distribution
Buying goods from group companies at prices that leave the South African distributor with persistent losses or a margin below the arm’s length range is a classic audit issue.
Royalties and intangibles
Payments for trademarks, technology or know-how must reflect real value to the South African business, and should not be paid for intangibles that the local company itself developed.
Restructurings
Moving functions, risks or intangibles out of South Africa may require compensation, and SARS will want to see the analysis.
Documentation and consistency
Missing agreements, out-of-date benchmarks and ITR14 answers that do not match the documentation all increase both the chance of an audit and the difficulty of defending one.
A five-step process to identify transfer pricing risk
- Map the transactions. List every cross-border transaction with connected persons by type, value and counterparty country, without netting.
- Test the results. Compare each entity’s actual results with its expected arm’s length return and the benchmark range.
- Check the paper trail. Confirm there are signed agreements, invoices and evidence of services, and that the ITR14 disclosures agree.
- Quantify the exposure. Estimate the potential primary adjustment, secondary adjustment, penalties and interest for each issue.
- Rank and act. Prioritise by likelihood and impact, then fix the highest risks first.
The OECD Transfer Pricing Guidelines describe how tax authorities use documentation to risk-assess taxpayers. Looking at your group the way SARS would is the most effective way to spot issues early.
How to mitigate the risks
- Adjust prices prospectively, and use year-end adjustments where your agreements allow it
- Put clear, signed intercompany agreements in place and keep them current
- Refresh benchmarking studies and roll forward financial data annually
- Align the ITR14 answers with your documentation before filing
- Correct historic errors proactively where the exposure justifies it, with professional advice
- Consider an advance pricing agreement for large, recurring transactions, if your group qualifies
If SARS has already started asking questions, read our SARS transfer pricing audit guide for how to respond.
Impact’s transfer pricing risk assessment gives you a short, risk-rated report and a clear action plan, so you only spend where the risk justifies it.
Frequently asked questions
How often should we review our transfer pricing risk?
At least once a year before the financial year-end, and whenever the business changes, for example a restructuring, new financing or a new type of intercompany transaction.
Which risk is most common for South African subsidiaries?
Management fees and intra-group financing are among the most frequently questioned areas, together with loss-making entities that appear to carry limited risk.
Is a risk assessment useful for a company below the documentation threshold?
Yes. Section 31 applies regardless of size, so smaller groups benefit from knowing where their exposure is and fixing it cost-effectively.
