In South Africa, transfer pricing is associated with international transactions. That is not unreasonable, because the title of section 31 of the Income Tax Act (the ITA) itself refers to international transactions. The Taxation Laws Amendment Bill (the TLAB) published on 21 October 2026 changes this. It introduces transfer pricing in a domestic context for companies that operate in a special economic zone (SEZ). In this article, I consider why the risk arises, the new rules and what they may signal.
The profit-shifting risk in an SEZ
Transfer pricing addresses a situation where a high-taxed entity and a low-taxed entity form part of the same economic unit. The group is indifferent as to where the profit arises. It therefore has an incentive to shift profit into the low-taxed entity through pricing that is not at arm’s length. This happens in one of two ways. The high-taxed entity undercharges the low-taxed entity for a supply, which depresses the high-taxed entity’s income. This in turn allows the low-taxed entity to sell on and realise the profit. Alternatively, the low-taxed entity overcharges the high-taxed entity for something that the high-taxed entity deducts. Examples include services, interest, management fees or goods.
A qualifying company in an SEZ pays tax at 15%. The rate forms part of the incentive to operate in a zone, but it creates a transfer pricing opportunity domestically. Section 12R of the ITA currently addresses this risk through disqualification. A qualifying company loses the concession if more than 20% of its deductible expenditure, or more than 20% of its income, arises from transactions with connected persons subject to tax in South Africa. This makes it difficult for an SEZ company to form part of a larger group or value chain and still use the concession. This affects the effectiveness of the incentive.
Transfer pricing applied to SEZ transactions
For years of assessment starting on or after 1 January 2027, the disqualification falls away. Section 31 instead applies to transactions between a qualifying company in an SEZ and a connected resident that is not a qualifying company. The same opportunity exists between an SEZ company and a South African permanent establishment of a non-resident. Section 31, however, already covers those transactions. Where any term or condition of an affected transaction is not at arm’s length, the person who derives the tax benefit must calculate its taxable income as if the terms were at arm’s length. That is the person who benefits from the reduction, deferral or avoidance of tax. The requirement mirrors section 31 in its international context. The whole of section 31 applies to these transactions, including the secondary adjustment, so a deemed dividend can arise.
The TLAB adds something that section 31 does not contain for the transactions it already covers. In a cross-border context the party that derives the benefit is taxed in South Africa and the counterparty is not, so a one-sided adjustment causes no double taxation. In a domestic context both parties fall within the South African tax net. New section 31(2A) therefore requires a corresponding adjustment for the other party. If the qualifying company buys from the non-qualifying company, the price the non-qualifying company charges must be adjusted to arm’s length and the deduction the qualifying company claims must be adjusted correspondingly. The corresponding adjustment is a new concept in section 31.
Documentation and the burden of proof
A public notice prescribes the transfer pricing documentation that larger taxpayers must keep in an international context. For other taxpayers, including those with these new affected transactions, the taxpayer bears the burden of proving that it calculated its taxable income on arm’s length terms. In practice this means a transfer pricing policy and benchmarking studies that establish what independent parties would have agreed. One would expect similar types of documents the context of these domestic transactions for taxpayers to discharge the burden of proof.
Mispricing between connected residents outside SEZs
Does domestic transfer pricing for SEZ companies mean we should prepare for more of it? The exposure for the fiscus is more limited where no single entity has a materially different tax rate. Opportunities do exist. Examples include where one connected entity has an assessed loss and the other does not, or where one is exempt and the other is not. In my view, however, the fiscus does not necessarily need transfer pricing to address that risk. Existing measures already do so, and taxpayers often overlook them.
Section 11(a) of the ITA allows a deduction for expenditure incurred in the production of income for purposes of the taxpayer’s trade . A taxpayer paying a service fee for a service it does not receive, or pays an excessive amount, SARS may deny the deduction on that basis. There is no corresponding adjustment when a section 11(a) deduction falls away, so the recipient remains taxed on the income. The approval conditions for a public benefit organisation (PBO) require that the PBO not form part of a scheme to reduce, postpone or avoid tax, so a PBO that takes part in mispricing risks its exempt status. Where neither rule applies and someone derives a tax benefit from pricing that is not at arm’s length, the general anti-avoidance rule (the GAAR) may come into play. Rights and obligations that are not at arm’s length form one of its tainted elements.
Some commentators suggest that the SEZ rules are the first of more domestic transfer pricing provisions. I am not convinced. Transfer pricing is expensive and onerous for taxpayers, and it is not easy for SARS to enforce. If the SEZ transfer pricing rules work well, they may nonetheless prove to be the first of many.
Take-home message
Transfer pricing in South Africa is no longer limited to international transactions. The SEZ rules in section 31 give a glimpse of how domestic transfer pricing could work. Where no formal transfer pricing rules apply, section 11(a), the PBO approval conditions, and the GAAR already protect the fiscus against mispricing between connected persons.
You can listen to more about this topic in the episode of my podcast, Tax Break:
