School of Accountancy (ETDs)

Permanent URI for this communityhttps://hdl.handle.net/10539/37779

Browse

Filter results by typing the first few letters
Now showing 1 - 1 of 1
  • Thumbnail Image
    Item
    After the 2021 amendments to section 23M, what further amendments are required in section 23M to align with BEPS Action 4 recommendations?
    (University of the Witwatersrand, Johannesburg, 2023) Busakwe, Ndawoyakhe; Kolitz, Maeve
    Debt financing is an essential source of investment in South Africa as a country importing capital. As much as an economy in a good state depends on investments, taxpayers can use debt financing to create opportunities for base erosion and profit shifting (National Treasury, 2020a:5). The use of interest deductions to fund tax-exempt income and tax relief obtained on the deduction of interest expense which is higher than the net interest expense of a group can also create opportunities and ways in which taxpayers erode the tax base (OECD, 2015:16). Kruger (2015:12) noted that revenue authorities worldwide have been concerned for many years about the tax effect of debt financing, particularly what they perceive as debt funding that taxpayers utilise for tax avoidance and erosion of the tax base. In order to combat base erosion, several foreign jurisdictions have enacted interest deduction limitations and anti-hybrid instrument provisions, and the Organisation for Economic Co-operation and Development (OECD) raised this issue as one of its focus areas on Base Erosion and Profit Shifting (BEPS) (Kruger, 2015:12). Section 23N and s 23M became effective in the Income Tax Act 58 of 1962 (the Act) in South Africa between 2014 and 2015 respectively. Both of these provisions applied an interest limitation based on the ratio between the particular interest and a tax proxy for adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) (Van der Zwan, Schutte and Krugell, 2018:1). Kruger (2015:11) stated that: ‘fiscal authorities around the world have been concerned for some time that excessive debt funding could lead to tax avoidance which is caused by a mismatch between the tax treatment of interest incurred and interest received, which could result in excessive deduction of interest expense.’ In the South African context, National Treasury also acknowledged in the 2013 Budget Review that, although debt financing might have a positive impact on a iii healthier economy, taxpayers often use it to erode the South African tax base (National Treasury, 2013a:55). In order to protect the South African tax base as far as excessive interest deductions are concerned, National Treasury introduced s 23M through the 2013 Taxation Laws Amendment Act No 13 of 2013, with effect of 1 January 2015. In a joint project by the OECD and Group of Twenty (G20) on BEPS, it was identified that the deductibility of interest for purposes of calculating taxable profits should be one of the focus areas in order to counter BEPS, which was followed by the analysis and release of the final report titled OECD/G20 Base Erosion and Profit Shifting Project: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4: 2015 Final Report (BEPS Action 4 Final Report) (Van der Zwan et al., 2018:1). BEPS Action 4 contains recommendations for jurisdictions to implement the measures proposed to address the risks by interest payments and the related tax deductions to the corporate tax base (Van der Zwan et al., 2018:1). The purpose of this report is to examine how closely the South African interest limitations rules contained in s 23M align with BEPS Action 4 recommendations and to the extent that s 23M and BEPS Action 4 are not aligned, the report will determine further amendments that are required in s 23M of the Act to align with the BEPS Action 4 recommendations. The research includes a comparison of s 23M and BEPS Action 4 recommendations before the 2021 amendments to s 23M; discussion of the 2021 amendments to s 23M; analysis of the current differences and similarities between s 23M and BEPS Action 4 recommendations; and discussion of what further amendments are required in s 23M to align with BEPS Action 4 recommendations.