Exchange control and transfer pricing requirements when making royalty and fee payments to non-residents

The reason for this change was to support government’s efforts to reduce the administrative burden for the approval of offshore payments from an exchange control point of view, while also facilitating compliance with the transfer pricing regulations issued by South African Revenue Service (“SARS”).

Before being able to externalise any payments to a non-resident party, a resident company needs to comply with the exchange control regulations and guidelines set out by the South African Reserve Bank (“SARB”), who regulates the movement of foreign currency both in and out of South Africa.

In terms of tax transfer pricing requirements, transactions entered into between cross-border related parties must be carried out at arm’s length using a fair and market related price. Up until the change, the exchange control requirements to remit such payments did not align with the SARS transfer pricing requirements, resulting in additional processes to be followed to support the transfer of funds.

Prior to the circular being issued:

Prior to the release of the circular, where a South African resident made a royalty and/or fee payment to a non-resident related party (i.e. for the use of foreign technology, intellectual property and for services rendered), an application had to be submitted to the SARB via the company’s Authorised Dealer¹ (“AD”) for permission to make the payment.

The AD in turn then had to submit an application to the Financial Surveillance Department of the SARB for permission to proceed with the payment. The average turn-around time of an application was between 4 and 6 weeks.

As part of this application, the applicant was the required to provide evidence to the SARB of how the payments were calculated, and whether they were reasonable in terms of industry standards.

Where similar payments were being made to unrelated non-resident parties in respect of royalties and fees, such payments were freely transferrable, provided that the AD had sight of the relevant agreements entered into between the parties and copies of invoices.

Following the sarb circular being issued

In the case of payments being made to related parties, the application no longer needs to be adjudicated by the SARB and can now be approved by the AD, reducing the turnaround time of the request.

As part of the application, the AD would need to have sight of the following documentation:

• A copy of the royalty or service agreement entered into between the parties; and
• In all cases, a copy of an invoice from the non-resident party that verifies the purpose of the payment and the amount of the payment to be made.

With reference to SARS Notice no. 1334 included in Government Gazette no. 40375 (28 October 2016), the AD must also be provided with the following confirmation from senior management of the applicant company making the payment:

• Confirmation that the transfer pricing documentation is maintained as prescribed by SARS; and
• In the case of ad-hoc services being rendered, confirmation that the transaction has been concluded at an arm’s length market-related price.

Transfer pricing documentation includes both the local and master files.

If a South African resident entity engages in cross-border related party transactions exceeding ZAR 100 million, it must prepare and submit both a Local and Master File to SARS. If the cross-border related party transactions are below ZAR 100 million, there is no mandatory requirement to prepare and submit documentation, however there is a requirement to be able to support the arm’s length nature of these transactions. In this instance, it is recommended that the taxpayer prepares a high-level Local File that considers all cross-border related party transactions and their pricing. Regardless of the transaction value, the burden of proof lies with the taxpayer.

For more details regarding the transfer pricing documentary requirements, please refer to our summary here.

Ad reporting requirements:

Although no permission is required from the SARB, the AD’s must still report any royalty and fee payments to the SARB:

• On a quarterly basis, the AD will need to provide the SARB with details of the name and registration number of any South African companies making such payments as well as the name of the non-resident related party mentioned in any agreement provided to the AD; and
• Where recurring payments are being made, the South African company making such payment must also present a letter in respect of such payment made on an annual basis. The letter should be drafted by their independent auditor confirming the percentage of the royalty and the amount transferred over a 12-month period.

Payments being made to unrelated non-resident parties follow a similar process as detailed above but they do not need to comply with the requirements of SARS Notice no. 1334.

Licence agreements involving the local manufacture of goods

Any royalties and fees payable to non-resident parties (related or non-related) involving the manufacture of goods do not follow the same process as detailed above.

Circular 13 of 2024 also amends the wording of the requirements applicable to these payments. These requirements are set out below:

• In the case of new, renewed or amended licence agreements involving the local manufacture of goods, licensees should submit the royalty agreement in triplicate in support of the DTP 001 application from to the Department of Trade and Industry (“DTI”) for approval and not the SARB. This process ensures that the royalties calculated on the goods are in line with industry standards and are at a market-related price;
• Once approval has been obtained from the DTI, when making the corresponding royalty fee payment to the non-resident party, the AD must be satisfied that the payment falls within the terms of the agreement laid down in the authority granted by the DTI;
• The AD will need to have sight of the approval letter from the DTI as well as an invoice issued by the licensor verifying the purpose of the payment and the amounts involved;
• Where payments are made, they will be approved by the AD, provided they are considered to be normal in the trade concerned; and
• An annual letter from an independent auditor of the local entity will also need to be presented to the AD, confirming the amount and percentage transferred has been correctly calculated and is reasonable with reference to the trade concerned.

The takeaway

Royalty payments and payments for services rendered to non-resident parties will always need to be routed via the AD of the resident company making the payment.  As part of this application, supporting documentation will need to be provided to the AD to confirm the payments are in line with the transfer pricing principles.

To ensure that the correct supporting documentation has been prepared in support of the application, and to streamline the payment process, it is advisable to consider both the exchange control and transfer pricing requirements concurrently.

Authors:

Sharon MacHutchon

Kaneez Khair

¹_{Authorised Dealer means, in relation to any transaction in respect of gold, a person authorised by the Financial Surveillance Department to deal in gold and, in relation to any transaction in respect of foreign exchange, a person authorised by the Financial Surveillance Department to deal in foreign exchange.}