The erosion of the tax fiscus as a result of excessive interest deductions and the shifting of
the related profits (interest income) outside of the jurisdiction where such profits are derived,
is a worldwide phenomenon impacting both developed and developing nations. Such is the
gravity of this practice, that the Organisation for Economic Co-operation and Development
(OECD) performed a study on this matter and published recommended best practice
methodology and/or rules to combat this practice and consequently assist in protecting the
integrity of taxing systems.
In light of the above, the OECD recommended a best practice approach in the form of a
fixed ratio rule that must be applied to limit deductions in the form of interest amounts (and
other financial payments). This rule may be adopted together with a group ratio limitation
rule, and other special supplementary rules consisting of a de minimis threshold, the carry
forward of disallowed/unused interest, as well as special rules in respect of assessed loss
companies, financing instruments with tainted interest components and interest bearing
funding utilised for public benefit projects.
The purpose of this study is to ascertain the effectiveness of the imposition of such rules,
with a primary focus upon the fixed ratio limitation rule. Moreover, the secondary focus of
the study is to ascertain whether the imposition of such a rule positively assists in the
limitation of excessive deductions of interest amounts (as supported by the supplementary
rules recommended by the OECD). We have excluded from the scope of this study “other
financial payments”, and as such have only focused upon interest expenditure amounts.
The study herein also focuses upon the South African tax landscape, and the interplay of
the recommended best practice approach with the South African legislative provisions, as
currently contained in the tax laws.
Mini Dissertation (MCom)--University of Pretoria, 2019.