SOUTH AFRICA Law and Practice Contributed by: Ulrike Naumann, Alison Mellon, Joshua Janks and Aneria Bouwer, Bowmans
IN127 confirms the principle that the accept- able amount of debt must be determined on an arm’s length basis, which is inherently a detailed factual enquiry and takes into account a wide range of factors particular to the specific tax- payer. In assessing the arm’s length nature of a loan, SARS follows the guidance on the applica- tion of the arm’s length principle as contained in the OECD Transfer Pricing Guidelines, which involves a comparison of the conditions in a con- trolled transaction with the conditions that would have been made had the parties been independ- ent and undertaking a comparable transaction under comparable circumstances. Unfortunately, IN127 does not provide any form of safe harbour but it indicates that it will con- sider a taxpayer’s debt to be non-arm’s length if, amongst other factors, some or all of the fol- lowing circumstances exist: • the taxpayer is carrying a greater quantity of debt than it could sustain on its own (that is, it is thinly capitalised); • the duration of the lending is greater than would be the case if negotiated at arm’s length; and/or • the repayment, interest rate or other terms are not what would have been entered into or agreed to at arm’s length. Where the terms and conditions of the loan are not arm’s length and to the extent that there is a difference in the calculation of the taxable income under arm’s length conditions and the calculation in respect of the loan, the excess interest will be deemed to be a dividend in spe- cie, declared by the debtor where the debtor is a resident company, and where the debtor is a person other than a company, the excess will be deemed to be a donation by the debtor. The divi- dend or donation will be deemed to have been
paid on the last day of the period of six months following the end of the year of assessment in respect of which that adjustment is made. Generally, dividends in specie, are subject to dividends tax and donations are subject to 20% donations tax, subject to certain exemptions. In addition, the excess portion of the interest expenditure will be disallowed as a deduction. Specific Interest Deduction Limitations In addition to the above, Section 23M of the ITA places a restriction on interest deductions where: • the creditor is in a controlling relationship with the debtor; • the creditor is not in a controlling relationship with the debtor but: (a) obtained the financing from a person that is in a controlling relationship with the debtor; or (b) would have formed part of the same group of companies as the debtor if the phrase “at least 70 per cent of the equity shares in” in paragraphs (a) and (b) of the definition of a group of companies in Section 1 of the ITA were replaced by the expression “more than 50 per cent of the equity shares or voting rights in” ; or • the creditor is in a controlling relationship with the debtor and that creditor, directly or indirectly through another creditor that is in a controlling relationship with that creditor, obtained the funding for the debt advanced to the debtor from a person that is in a con- trolling relationship with that creditor or that other creditor; and • the amount of interest so incurred (or related interest) is not subject to tax in the hands of the person, creditor or other creditor to which the interest or related interest accrues.
411 CHAMBERS.COM
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