What is the arm's length principle for SARS?

The arm's length principle is the standard used by SARS to ensure that transactions between related parties (like a South African subsidiary and its foreign parent) are priced as if they were between independent entities. It requires the price to reflect fair market value, preventing profit shifting and ensuring the correct amount of tax is paid in South Africa.

Does my small business need a transfer pricing policy in South Africa?

If your South African business engages in cross-border transactions with a connected person, you are legally required to comply with transfer pricing rules. While only businesses with transactions over R100 million must submit a formal Master File/Local File, all businesses must be able to prove their pricing is at arm's length if audited by SARS.

What are the penalties for SARS transfer pricing non-compliance?

Failure to comply with SARS transfer pricing rules can result in taxable income adjustments, causing higher tax bills and interest. Additionally, SARS can levy understatement penalties ranging from 10% to 200%. The adjusted amount may also be treated as a 'deemed dividend,' triggering an extra 20% Dividends Tax liability for the company.

How do I calculate an arm's length price for a loan?

To calculate an arm's length price for a cross-border related-party loan, you should use a market-related interest rate. SARS typically looks at the creditworthiness of the borrower and the prevailing rates for similar loans between independent parties. Often, a rate based on the South African Prime rate or JIBAR with a risk-adjusted margin is used.

SARS Transfer Pricing Guide for SMEs

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