South Africa proposes model legislation to introduce APA program

The South African Revenue Service (SARS) on December 10 published a high-level model and draft legislation for the introduction of an advance pricing agreement (APA) program.

SARS plans to launch a pilot APA program after the legislation framework is finalized. The pilot program will only accept bilateral APA applications so that SARS will have an opportunity to learn by working with other jurisdictions before expanding the program.

The agency notes the importance of establishing an APA program to provide clarity and certainty to taxpayers but adds that “the scarcity of transfer pricing expertise in the country” has been an impediment. Accordingly, it states that establishing a South African APA program will require development of an APA unit within SARS, as well as expansion of the SARS transfer pricing unit’s capacity.

Feedback will be accepted on the proposed model and draft legislation until January 31, 2022.

Proposed APA process overview

The model describes a process flow for the APA program broken out into various stages.

In the pre-application stage, a taxpayer requests a pre-application consultation and pays an associated fee. The consultation is then held, and SARS makes a decision regarding whether the taxpayer may apply for an APA.

In the APA application stage, the taxpayer formally submits the APA application and pays the fee, and SARS reviews the application for completeness and acceptability.

The program then moves to the APA processing stage, during which the case is assigned to a team that analyzes the application and engages with the taxpayer. In addition, SARS establishes its position for negotiation with the foreign tax authority and a preliminary APA.

Next is the negotiation stage, in which agreement is reached with the foreign tax authority. The taxpayer will be permitted input on the agreed preliminary APA and may decide whether to sign.

In the finalization stage, the taxpayer pays outstanding fees and signs the agreement, which is also signed by the tax authorities.

The APA then enters the implementation and monitoring stage, during which the taxpayer implements the APA and submits compliance reports. The SARS APA unit reviews and, if necessary, audits. Amendment or termination procedures may also be initiated.

In the final stage, the APA may be terminated, amended, or extended. Amendments may be needed due to changes in law or circumstances and require renegotiation. Termination may be required due to the APA reaching the end of its term or early termination due to non-compliance, fraud, or other issues. The APA may also be extended with applicable fees paid.  

Remaining issues

There are additional issues that SARS notes it must still address for an APA program.

These include eligibility issues, such as which taxpayers may apply for APAs and the minimum value of affected transactions to qualify.

There are also procedural issues, including the parameters for the South African competent authority to enter into an APA, applicable fee amounts, and operational guidelines.

SARS also highlights the technical issue of how to define the “most appropriate transfer pricing method.”