Global Tax Alert | 9 July 2013

South African National Treasury seeks to limit interest deductions involving cross-border group member debt

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On 4 July 2013, the South African National Treasury released proposed legislation that seeks to limit interest deductions stemming from debt owed by South African subsidiaries to foreign parent companies (or to foreign brother-sister companies). The proposed legislation follows the National Treasury media release in April.1

The purpose of the proposed legislation is to limit the loss of South African revenue caused by excessive debt between cross-border members of the same economic group. Under the proposal, interest deductions from debts of this kind generally cannot exceed 40 percent of the South African company’s taxable income. Interest deductions above this threshold can be carried forward to subsequent years.

The proposed legislation is part of an overall effort to stop base erosion and is likely to be approved by Parliament in some form later in the year (with a probable effective date of years of assessment commencing from 1 January 2014). In order to mitigate the unintended impact of the proposed legislation, National Treasury has requested comment. Taxpayers potentially impacted by the legislation should also consider restructuring their affairs (e.g., converting “excessive” debt to equity) to prevent the effects of potential double taxation (non-deductible interest on the one side and actual or deemed interest on the other).

It should also be noted that the South African Revenue Service is currently reviewing draft guidance pertaining to transfer pricing as applied to interest deductions. While the National Treasury media statement suggested the possibility of a safe harbor, the pending legislation does not contain a transfer pricing safe harbor of any kind. Perhaps, this safe harbor will be contained in the revised draft guidance.

Endnote

1. See EY Global Tax Alert, South Africa issues draft rules on excessive debt; comments requested by 24 May 2013, dated 29 April 2013.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Advisory Services Ltd, Johannesburg, South Africa
  • Keith Engel
    +27 11 772 5082
    keith.engel@za.ey.com
  • Justin Liebenberg
    +27 11 772 3907
    justin.liebenberg@za.ey.com
Ernst & Young (China) Advisory Services Limited, Pan African Tax Desk, Beijing
  • Rendani Neluvhalani
    +86 10 5815 2831
    rendani.neluvhalani@cn.ey.com
Ernst & Young LLP, Pan African Tax Desk, New York
  • Dele Olaogun
    +1 212 773 2546
    dele.olaogun@ey.com
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
  • Leon Steenkamp
    +44 20 7951 1976
    lsteenkamp@uk.ey.com

EYG no. CM3620