Interest-deduction limitation - Section 23M

• Date: 01 March 2015
• Pages: 11-21
• Author: Des Kruger
• DOI: 10.10520/EJC172217
• Published date: 01 March 2015

11

© SIBER INK

Interest-Deduction Limitation

SECTION 23M

DES KRUGER1

ABSTRACT

While recognising the need for debt capital, f‌iscal authorities throughout

the world have been concerned for some time now that excessive debt

funding could lead to tax avoidance. Such tax avoidance occurs where there

is a mismatch between the tax treatment of interest incurred and interest

received. Transactions have been identif‌ied in terms of which deductible

interest is paid to foreign and local persons that do not attract tax in their

hands. This issue has been addressed by the OECD under Action Plan 4 (Limit

base erosion via interest deductions and other f‌inancial payments).

Section 23M of the Income tax Act 58 of 1962 (‘the Act’), was introduced

with effect from 1 January 2015 to specif‌ically address this potential tax avoid-

ance. In essence, section 23M limits the interest that may be deducted by a

taxpayer where the taxpayer (debtor) is in a ‘controlling relationship’ with the

creditor, or the debt is funded by a person who is not in a controlling relation-

ship with the taxpayer, but the funds are indirectly provided by a person who

is in a controlling relationship with the taxpayer. However, the provisions of

section 23M are triggered only if the recipient of the interest is not subject to

tax on such receipt. Section 23M will also not be triggered if the interest falls

to be included in the net income of a controlled foreign company (‘CFC’) or

has been disallowed under section 23N of the Act.

Issues that are addressed in this article include the meaning of certain of

the terms, including what is meant by ‘subject to tax’ and the interaction of

sections 23M, 23N and 31. The article concludes that ‘subject to tax’ means

that the recipient of the interest must actually be liable to pay tax on the

receipt, albeit that tax may not actually be payable because of an applicable

deduction or set off of an assessed loss, for example.

While section 23M has been amended to make it clear that section 23N

must be applied before section 23M is applied, the issue as regards the inter-

action of section 31 and the other sections remains unclear. However, the

article concludes that section 31 (the transfer-pricing provisions) should take

precedence as the other sections rely on the determination of the tax payer’s

taxable income, which can only be determined after the application of section

31.

While it has been suggested that the provisions of section 23M may fall

foul of the non-discrimination provisions of our many tax treaties, the article

concludes that this is not the case.

1

The views expressed by Des Kruger are his personal views and in no way represent

the views of SARS or any other organisation to which he may be aff‌iliated.