Most Read Contributor in South Africa, September 2016
In line with recent pronouncements by the OECD relating to
so-called Base Erosion and Profit Shifting Project
(BEPS), section 23M was introduced by the Taxation Laws Amendment
Act, 31 of 2013. Section 23M of the Income Tax Act, 58 of 1962
("the Act") will come into effect on 1
January 2015 and has a similar purpose to the thin capitalisation
provisions of section 31 of the Act. The Taxation Laws Amendment
Bill, 13 of 2014, as tabled in parliament, contains a number of
substantial amendments to the current provisions of section 23M. A
summary of the provisions of section 23M following these amendments
is set out below.
Section 23M sets an interest deduction limitation for a debtor
and will apply if a "controlling relationship" exists
between the debtor and the creditor. A controlling relationship
will exist where a person directly or indirectly holds at least 50
per cent of the equity shares or voting rights in a company. The
interest deduction limitation will also apply in respect of a debt
owed to a creditor that is not in a controlling relationship with
the debtor where the creditor obtained the funding for the debt
advanced from a person that is in a controlling relationship with
the debtor. The interest deduction limitation will, however, only
apply if the amount of interest is not subject to tax in the hands
of the recipient or not included in the net income of a controlled
foreign company and also not disallowed under the provisions of
section 23N dealing with the limitation of interest deductions in
respect of reorganisation and acquisition transactions.
The interest deduction limitation will be calculated on the
the amount of interest received by or accrued to the debtor;
a percentage of the adjusted taxable income of the debtor to be
determined in accordance with a formula which links deductible
interest to the average repo rate for the year.
The formula will be, therefore, adjusted where there is a change
to the average repo rate together with a 400 basis point addition
to the average repo rate. The interest deduction limitation will
have ceiling of 60 per cent of the adjusted taxable income of the
debtor which will exclude the previous year's assessed loss.
Any interest in excess of the limitation may be carried forward to
the following year. The interest deduction limitation will not
apply to any interest incurred by a debtor in relation to
back-to-back loans where the creditor obtained those funds from an
unconnected lending institution in relation to the debtor and the
interest is determined with reference to a rate that does not
exceed the official rate of interest as defined in the Seventh
Schedule plus 100 basis points.
National Treasury and SARS are of the opinion that section 23M
has a broader objective than the thin capitalisation provisions of
section 31 and that section 31 will first apply to determine the
correct pricing of the debt owed. Where the amount of interest is
taken into account in terms of a reorganisation and acquisition
transaction under section 23N, the provisions of section 23M must
be applied to any amount not already disallowed under section
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The expansion of the West African regional market to foreign investors, and the search for emerging markets has led to a continuous increase in business mobility and cross border investments with Nigeria.
Effective collaboration amongst government agencies, automation of processes and capacity building by tax authorities have always been identified by stakeholders as strategies for achieving an efficient tax system.
The major objective of the waiver is to promote voluntary compliance and consequently generate revenue for government which otherwise, could have been lost.
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