Draft South African guidance details tax rules denying deduction for royalty payment on “tainted” IP

The South African Revenue Authority on January 9 issued draft guidance interpreting a 2009 law which denies a tax deduction for royalties paid to use “tainted” intellectual property.

The South African draft interpretive note concerns an anti-avoidance provision contained in section 231 of the Income Tax Act which addresses situations where intellectual property is created in South Africa, is sold to a party connected to the developer that pays no or low tax, and is then licensed back into South Africa.

The section disallows a deduction for expenditures incurred for the use of the intellectual property or provides for partial deduction when withholding tax on the royalties applies.

The draft guidance clarifies definitions found in the law, including the definitions for intellectual property, end user, and taxable person;  gives examples of when intellectual property will be considered tainted; and clarifies how other provisions will be applied.

Comments on the draft are due April 30.