South African tax bill would amend rules on interest deductibility, assessed losses

On July 28, the South African Revenue Service and National Treasury released various draft tax bills that would enhance the rules relating to the limitation on interest deductions on payments to persons not subject to tax and would restrict the set-off of the balance of assessed losses in determining taxable income, among other changes.

The draft bills contain proposals announced in the 2021 budget in February and will be introduced to Parliament later this year. Comments on the draft bills will be accepted until August 28.

Regarding interest deductibility, the draft Taxation Law Amendment Bill proposes expanding the definition of “interest” to include payments under interest rate swap agreements, the finance cost element in finance lease payments, and foreign exchange differences. The bill would also amend the formula for calculating the deductible interest limitation and revise rules applicable to back-to-back loans and real estate investment trusts. Additional amendments to the rule aim to ensure its more consistent treatment regardless of which country the payment is routed through.

With respect to assessed losses, the bill proposes to broaden the corporate income tax base by restricting the offset of the balance of assessed losses carried forward to 80% of taxable income. The proposal would extend to the balance of assessed losses at the time of implementation. The proposed restriction would only affect companies that would be in a positive taxable income position before setting off the balance of assessed losses.

Both changes are proposed to apply to years beginning on or after April 1, 2022.

Other business measures in the Taxation Law Amendment Bill would clarify the definition of contributed tax capital, limit the potential for double taxation under hybrid debt-avoidance rules, and clarify the meaning of “interest” under the debt relief rules.

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