The enabling legislation to bring the transfer pricing and thin capitalisation rules into the South African Income Tax Act was passed in 1995. In 1999 the South African Revenue Service (SARS) issued a comprehensive practice note setting out guidance on acceptable transfer pricing methods and the documentation that would be required. In large measure, this was based on the OECD Transfer Pricing Guidelines.
The transfer pricing legislation did not include any punitive consequences for failure to apply arm's length pricing. The legislation effectively provides for the taxable income to be adjusted by the extent to which the prices are not arm's length, and for that adjustment to be deemed to be a dividend. To the extent that there is an adjustment to taxable income, there will automatically be interest payable on the underpayment of tax, unless the taxpayer can on reasonable grounds contend that its version was correct. There were no specific provisions made for penalties. The
