Abstract
Background: The Organisation for Economic Cooperation and Development (OECD) made a number of recommendations in relation to interest deduction limitations as part of the Base Erosion and Profit Shifting (BEPS) project. In 2016 the South African National Treasury indicated that the interest deduction limitations contained in the Income Tax Act would be reviewed in the light of these recommendations. Aim: This paper aimed to describe funding structures of companies in South Africa liable for tax and how this relates to other characteristics, including ownership, of the companies. Setting: The research was performed using data from tax returns submitted by companies liable for income tax in South Africa. Methods: This paper reports on descriptive analyses of the research conducted. Results: The results showed that the mean interest-to-earnings before interest, taxes, depreciation, and amortisation (EBITDA) ratio for certain foreign-owned entities differed significantly from that of domestically owned entities. Conclusion: The results may present evidence of profit-shifting activities. They also highlight trends in interest-to-EBITDA ratios that may be of relevance for future legislative developments. Further related research is required if interest deduction limitations in the South African tax legislation are to be reviewed in light of the OECD proposals.
Highlights
BackgroundThe Organisation for Economic Cooperation and Development (OECD) made a number of recommendations in relation to interest deduction limitations as part of the Base Erosion and Profit Shifting (BEPS) project
Introduction and backgroundAs part of the Organisation for Economic Cooperation and Development (OECD)/Group of Twenty (G20) project on Base Erosion and Profit Shifting (BEPS), the OECD identified the deductibility of interest for purposes of calculating taxable profits as one of the areas that required attention (OECD 2013)
It is recommended that further research be performed by analysing the characteristics of the individual foreign-held companies that appear in the 75th percentile and upwards to determine whether further indicators of aggressive behaviour can be identified
Summary
The Organisation for Economic Cooperation and Development (OECD) made a number of recommendations in relation to interest deduction limitations as part of the Base Erosion and Profit Shifting (BEPS) project. In 2016 the South African National Treasury indicated that the interest deduction limitations contained in the Income Tax Act would be reviewed in the light of these recommendations. Aim: This paper aimed to describe funding structures of companies in South Africa liable for tax and how this relates to other characteristics, including ownership, of the companies.
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