Amendments to thin capitalisation legislation
By Graeme Saggers, Nolands SA
Section 31 of the Income Tax Act, which addresses transfer pricing in South Africa, was recently amended and has been in effect as of March 2014. Prior to that, the law included a 3:1 ratio of loan-to-equity safe harbour provision, which meant that the interest incurred by a South African company on the portion of a loan that exceeded three times the value of equity would be deemed to be excessive.
The deduction for the excessive interest would not be allowed and it would be treated and taxed as a dividend. The amended legislation now requires that any loan from a non-resident be at arm’s length, with the intention being to align the South African legislation with the guidelines of the OECD. Whilst this may sound simple and less onerous, the burden of proof has increased dramatically.
The South African Revenue Services (SARS) have to date only provided a draft interpretation note which, instead of providing guidelines for what may or may not be interpreted as arm’s length, merely indicates that each case will be decided based on the facts and details what factors may be taken into account. Potential investors therefore need to ensure that there is sufficient evidence to support the assertions that the terms of the loan are the same as that which would be available from an independent South African party (e.g.a bank) and that there is a need for the loan capital from the borrower’s perspective. Foreign investors are encouraged to pre-empt the risk of disallowed deductions by gathering the appropriate evidence prior to the loan capital being advanced.
Nolands SA, Cape Town, South Africa
T: +27 21 658 6600
Graeme Saggers CA (SA), BCom (Nom). Graeme is the Tax Director of Nolands Advisory Services Africa, which is the advisory division of the firm of Nolands. Nolands is a top ten audit, advisory and tax firm in South Africa and is a member of Geneva Group International. Graeme gained a Bachelor of Commerce and Honours in Accounting at Rhodes University and, after qualifying as a Chartered Accountant (South Africa), he joined Nolands where he is now head of the Tax Department.
Nolands SA is a national auditing firm, located in 10 offices in including all major centres in South Africa and Mauritius, employing almost 200 people focussed on providing the best possible solutions for its clients. Nolands prides itself on being "not ordinary" and in its ability to integrate services and respond rapidly to clients' needs.
published: June 2014