A qualitative analysis of the international conformity of the proposed amendments to section 23M of the Income Tax Act No. 58 of 1962

Master Thesis


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Base erosion and profit shifting (BEPS) is the practice whereby multinational entities use tax planning mechanisms to exploit gaps in tax legislation to avoid a potential tax liability. In order to address this risk in South Africa, the Government previously introduced, amongst other things, section 23M of the Income Tax Act, No. 58 of 1962 (the Act) (an interest deductibility limitation section). However, in 2021, the Government proposed certain amendments to the interest limitation rules found in section 23M. The research question that this dissertation thus seeks to address is: will the proposed restriction on deductibility of interest on connected party debt, which is proposed for South Africa to be at 30% of adjusted earnings, align with international best practice? This dissertation thus, firstly considers the international conformity of the proposed amendments to section 23M of the Act. To establish such conformity, the benchmarks against which the South African amendments are measured are the BEPS project, as produced by the Organisation for Economic Co-operation and Development (OECD), guidance provided by the African Tax Administration Forum (ATAF) and research performed by the International Monetary Fund (IMF). This dissertation then examines the current section 23M of the Act and the reason for its introduction and design. While the section assists with certain situations which may result in excessive interest deductions, the following items create some contention, namely; the section is only applicable to connected party debt and not third party debt, concept of ‘subject to tax', and the section provides no clarity regarding the time limitation of the carry forward of unused interest capacity. This dissertation also considers the guidance provided by the abovementioned international bodies. The overarching outcomes of the work performed by these bodies are that a limit of some sort is to be placed on interest deductions in order circumvent excessive interest deductions and, in turn, protect the fiscus. As indicated, the specific aim of this dissertation is to consider whether a 30% of earnings limit in South Africa will align with the guidance provided by the mentioned international bodies. Based on the research conducted, this dissertation finds that, from an overall perspective, the newly promulgated interest limitation rules in section 23M of the Act does conform to the guidance provided by these international bodies, especially the OECD and ATAF.