Transfer pricing governs how related parties price cross-border transactions inside a multinational group. In South Africa it sits in section 31 of the Income Tax Act 58 of 1962, which requires cross-border affected transactions between connected persons or associated enterprises to be priced at arm's length. Where aggregate potentially affected transactions exceed R100 million a year, a local file (and possibly a master file) is required; groups with a South African parent and consolidated revenue of R10 billion or more must also file a country-by-country report. Getting it wrong can trigger a primary adjustment, a secondary adjustment taxed as a deemed dividend at 20%, and understatement penalties of 10% to 200%. At CommTax, Advisory runs the analysis and advisory; Global coordinates the documentation and submissions across jurisdictions.
- What transfer pricing actually is
- The law: section 31 of the Income Tax Act
- Who is caught: connected persons and associated enterprises
- The arm's-length principle and the five methods
- Documentation and the R100 million threshold
- Country-by-country reporting
- Adjustments, secondary adjustments and penalties
- How CommTax handles transfer pricing
- Sources and further reading
- Frequently asked questions
What transfer pricing actually is
Transfer pricing is the pricing of transactions between related parties that sit in different tax jurisdictions, the goods, services, loans, royalties, management fees and guarantees that flow within a multinational group. Because the parties are related, the price is not automatically set by an open market, so tax authorities require it to reflect what independent parties would have agreed. That standard is the arm's-length principle.
The concern for SARS is straightforward: mispriced intra-group transactions can shift profit out of South Africa and into a lower-tax jurisdiction, eroding the local tax base. Transfer pricing rules exist to put the South African tax result back where it would have been on arm's-length terms.
The law: section 31 of the Income Tax Act
South Africa's transfer pricing regime is built on section 31 of the Income Tax Act 58 of 1962. Section 31 empowers SARS to adjust the tax result of a cross-border affected transaction between connected persons or associated enterprises where the terms differ from arm's-length terms and confer a tax benefit on a party.
The rules are supported by SARS guidance, principally Practice Note 7 and its Addendum, Interpretation Note 127 (documentation) and Interpretation Note 128 (associated enterprises), read alongside the OECD Transfer Pricing Guidelines, which South Africa applies as persuasive guidance.
Who is caught: connected persons and associated enterprises
Section 31 originally applied to transactions between connected persons. For years of assessment commencing on or after 1 January 2023, the term associated enterprise, aligned with Article 9 of the OECD Model Tax Convention, was inserted into section 31.
This matters because the "connected persons" test did not always capture arrangements that are clearly related in substance. The associated-enterprise concept is broader, so affected transactions now apply to both associated enterprises and connected persons. The practical effect is that more multinationals transacting with South Africa are now within scope, and groups that previously fell outside section 31 should reassess. SARS Interpretation Note 128 provides guidance on the meaning of associated enterprise.
Watch this if you are a group: the 1 January 2023 change means a transaction that was outside transfer pricing under the old "connected persons" test may now be an affected transaction. Reassessing scope is the first step, not the documentation.
The arm's-length principle and the five methods
The arm's-length principle asks a single question: would independent parties, dealing at arm's length, have agreed these terms? To answer it, the OECD framework provides five recognised methods, and the taxpayer must select the most appropriate method for the transaction and support it with comparable data.
| Method | Typically used for |
|---|---|
| Comparable Uncontrolled Price (CUP) | Commodities and transactions with close external comparables |
| Resale Price | Distributors reselling goods with little added value |
| Cost Plus | Manufacturers and service providers priced on a cost mark-up |
| Transactional Net Margin (TNMM) | The most common method; tests net profit margins against comparables |
| Profit Split | Highly integrated operations or unique, valuable intangibles |
The output of the analysis is an arm's-length range and a documented conclusion on whether the intra-group pricing falls inside it. This analysis is the technical heart of any transfer pricing engagement.
The Waiting Room routes you to CommTax Advisory. We map the affected transactions and test scope before any documentation is prepared.
Documentation and the R100 million threshold
South Africa runs a two-tier documentation regime. The obligation depends on the value of your potentially affected transactions for the year of assessment, added together without offsetting them against one another.
| Aggregate potentially affected transactions | Documentation obligation |
|---|---|
| Exceeds, or reasonably expected to exceed, R100 million | Prepare a local file; a master file may also be required |
| Below R100 million | No prescribed master or local file, but the onus of proof stays with the taxpayer and contemporaneous documentation must be retained |
| All taxpayers within section 31 | Complete the transfer pricing schedule on the ITR14 corporate income tax return |
The critical point is that being below R100 million does not mean "do nothing". The burden of proving arm's-length pricing always rests with the taxpayer, so contemporaneous documentation is still expected. The threshold changes the formality of the file, not the underlying obligation to price at arm's length and be able to show it.
Country-by-country reporting
The largest groups face an additional layer. Where the ultimate parent entity is resident in South Africa and the group's total consolidated revenue is R10 billion or more in the preceding fiscal year, the group must file a country-by-country (CbC) report, together with a master file and local file. The CbC report discloses income, taxes paid and economic activity in each jurisdiction the group operates in, giving tax authorities a global picture.
Adjustments, secondary adjustments and penalties
If SARS concludes that a transaction was not at arm's length, three things can follow, and they compound.
1. The primary adjustment. SARS recalculates the taxable income as if the transaction had been priced at arm's length, increasing the South African tax base.
2. The secondary adjustment. Under section 31(3), the amount of the primary adjustment that gives a tax benefit is treated as a deemed dividend in specie, subject to dividends tax at 20%. SARS's stated view is that no beneficial owner exists for this deemed dividend, so the usual dividends-tax exemptions do not apply.
3. Understatement penalties. Under the Tax Administration Act, an understatement penalty of 10% to 200% of the tax shortfall can be levied, depending on the taxpayer's behaviour, from a reasonable-care lapse at the low end to intentional tax evasion at the high end. Interest can apply on top.
The takeaway: a transfer pricing adjustment is rarely just the tax on the mispriced amount. Between the primary adjustment, a 20% deemed-dividend charge and penalties of up to 200%, the total cost can far exceed the profit that was shifted. Good documentation, prepared before SARS asks, is the cheapest insurance available.
How CommTax handles transfer pricing
Transfer pricing spans two CommTax divisions, by design, so the analysis and the filing are each done by the right team.
CommTax Advisory runs the analysis and advisory. The arm's-length analysis, method selection, benchmarking, intra-group pricing policy, and the technical position, this is specialist Advisory work. Where a transaction is contested or a section 31 adjustment is in dispute, Advisory also runs it through the Dispute Resolution Framework.
CommTax Global coordinates the documentation and submissions. Once the policy and analysis are set, Global coordinates the transfer pricing documentation and submissions across each relevant jurisdiction, master file, local files and CbC reporting where required, through one point of contact, so every country's filing obligation is met as the group operates and expands.
The result is a single, coordinated transfer pricing position: analysed correctly, priced defensibly, and filed on time wherever the group has a footprint.
Sources and further reading
- Income Tax Act 58 of 1962, section 31 (transfer pricing / affected transactions).
- SARS, Practice Note 7 and Addendum; Interpretation Note 127 (documentation); Interpretation Note 128 (associated enterprises).
- SARS, Country-by-Country reporting.
- OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations; South Africa transfer pricing country profile (2025).
- Tax Administration Act 28 of 2011 (understatement penalties).
This guide is general information current at July 2026, not tax advice for a specific matter. Thresholds and rules change, confirm the current position before acting.