Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4 - 2015 Final Report

Abstract

You can copy, download or print OECD content for your own use, and you can include excerpts from OECD publications, databases and multimedia products in your own documents, presentations, blogs, websites and teaching materials, provided that suitable

An evaluation of interest deduction limitations to counter base erosion in South Africa

“…The suggested approach includes a general interest limitation (core rule) based on an interest-to-profit ratio. This is coupled with de minimis exclusion rules, exceptions for highly geared groups, and specific anti-avoidance rules to target identified instances not addressed by the general interest limitation rule (OECD 2015).…”

“…In this regard, a number of key differences exist between the current South African measures to address the risk of base erosion from interest deductions, as discussed above, and the best practice approach suggested by the OECD. These include that the South African reliance on the arm's length approach to provide an overall protection mechanism is relatively high, while the OECD questions the effectiveness of this approach (OECD 2015). In addition, the South African measures implemented focus on interest paid in respect of related party debt, while the OECD's proposal suggests an overall interest deduction limitation that would apply to both multinationals and standalone domestic entities (OECD 2015) but notes that countries should decide what is best for their economies.…”

“…These include that the South African reliance on the arm's length approach to provide an overall protection mechanism is relatively high, while the OECD questions the effectiveness of this approach (OECD 2015). In addition, the South African measures implemented focus on interest paid in respect of related party debt, while the OECD's proposal suggests an overall interest deduction limitation that would apply to both multinationals and standalone domestic entities (OECD 2015) but notes that countries should decide what is best for their economies. The range of acceptable levels of interest in relation to profits suggested by the OECD (10 to 30 per cent) appears to be significantly lower than those contained in specific South African anti-avoidance provisions.…”

“…This often results in minimal equity funding and high levels of internal debt, known as thin capitalization, to enjoy the benefits of the tax deductibility of the interest on debt (Buettner et al 2016;Gopalan et al 2007). The cross-border context means that multinationals can strategically place (shift) debt in high-tax jurisdictions so as to reduce taxable profits that are subject to relatively high effective tax rates in comparison with affiliates in other jurisdictions (OECD 2015).…”

“…The OECD (2015) notes that methods to counter base erosion through interest deductions include transfer pricing mechanisms, such as arm's length tests, and withholding taxes. Thin capitalization mechanisms generally involve the use of explicit threshold levels for the debt-to-equity ratio (Buettner et al 2016).…”