A critical analysis of SARS' implementation of Advance Pricing Agreements

Abstract

Though the concept of transfer pricing has been in existence for over a century, it continues to evolve over time while remaining a topical issue globally. The increase in cross-border transactions by multinational enterprises due to globalisation and internationalisation has increased the complexity of these transactions. This has resulted in lengthy and costly dispute resolution processes that pose uncertainty for multinational enterprises when contemplating investment destinations. This study aims to critically analyse and discuss the impending implementation of advance pricing agreements (APAs) by the South African Revenue Service (SARS). Specifically, the transfer pricing legislation of selected foreign countries that implemented APAs as well as the Organisation for Economic Corporation and Development (OECD) transfer pricing guidelines were analysed to determine whether SARS’ implementation of APAs can be beneficial. To test the hypothesis that the use of APAs is a proactive dispute resolution, a qualitative approach was applied to understand APAs, and the effect of its implementation thereof. A literature review was performed to address this study’s research questions with more reliance placed on theoretical sources rather than numerical data. The results showed that the use of APAs provide certainty, avoid time-consuming audits, and reduce transfer pricing dispute costs. These results suggest that the use of APAs encourages foreign direct investment and promote economic growth. On this basis, SARS should consider the implementation of APAs in the South African Income Tax legislation. The challenge that SARS may encounter is constraint of resources which may hamper the successful implementation thereof.