The government is gearing up to rake in a bigger share of multinational corporations’ profits.
The Treasury and SARS yesterday invited public comment on their “Proposed limitations against excessive interest tax deductions” [excessive deductions of interest from taxable income].
The country’s tax base, it said, is being eroded by “excessive deductions by some corporates with income effectively shifted to a no-tax or low-tax jurisdiction”.
Finance Minister Pravin Gordhan in a public lecture last week hinted that change was afoot and that “everyone has to pay their fair share”.
There were several statements by ministers last year to the effect that the government wants to get “a more equitable share” of the profits of exploiting the country’s natural endowments.
“Over the past several years, tax schemes by some corporates have become an increasing concern locally as well as globally,” SARS said.
It cited a report by the Organisation for Economic Cooperation and Development – a club of rich nations – that referred to “base erosion” in which one part of a company transacts business with another part, getting the tax-burden as low as possible.
“These deductions are typically channelled as interest, royalties, service fees or insurance premiums. Of greatest concern is excessive deductible interest,” said SARS.
A SARS document lists the following problems:
◾Hybrid debt, in which instruments are labelled “debt” though probably closer to equity and carrying tax implications;
◾Connected-person debt, in which the relationship between creditor and debtor becomes blurred;
◾Transfer pricing, in which excessive interest can arise in a cross-border context; and
◾Acquisition debt, in which excessive debt (or over-gearing) can result in the debt eliminating taxable profits for many years.
These problems limit the tax SARS can collect from multinational companies.
But yesterday SARS and the Treasury said they have a four-part proposal that will be considered for inclusion in the Taxation Laws Amendment Bill 2013, which will tighten the noose.