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Treasury Agrees to Amend Debt-Instrument Tax Plan

13 September 2013   (0 Comments)
Posted by: Author: Linda Ensor
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Author: Linda Ensor (BusinessDay)

The Treasury has agreed to amend some of its proposals on the taxation of hybrid debt instruments, in response to comments by tax experts on the Taxation Laws Amendment Bill, officials told Parliament’s standing committee on finance on Wednesday.

Significant concessions have also been made on proposals to tighten the regime for tax incentives for research and development. Several of the retrospective provisions in the bill, which raised a storm of protest, have been removed.

However, all these agreements by the Treasury will be subject to final approval by Finance Minister Pravin Gordhan, officials said during a briefing on the Treasury’s responses to public comments on the bill.

The proposals on hybrid debt instruments were introduced to protect the tax base from erosion, and prevent profit-shifting through excessive deduction of interest by using artificial or hybrid debt instruments, such as convertible loans.

These instruments are more like equity instruments than debt, but are used because interest is subject to a lower tax rate than equity.

In terms of the proposals, these instruments will be reclassified.

The Treasury has decided to withdraw the proposed rules dealing with the limitation of deductions on connected parties to allow for further consultation and to consider their full commercial implications.

The Treasury has also agreed to defer the effective date of the hybrid debt instrument proposals to April 1 next year to allow taxpayers to restructure their transactions in light of the new rules.

Critics of the bill were concerned that the proposed new rules would only apply to debt owed by resident companies, and not to branches of foreign resident companies.

The Treasury has accepted this criticism and agreed that the rules would apply to all companies.

Another reservation about the proposed new regime was that it would not apply to linked units of debt issued by property companies and owned by pension funds, long- and short-term insurance companies and real estate investment trusts.

The Treasury partly accepted the proposal that third-party debt should not be subject to the anti-hybrid rules, though it stipulated that this would depend on the terms of the transaction. The concessions were welcomed by South African Institute of Tax Practitioners CE Stiaan Klue and PwC director of tax David Lermer, who cautioned that there was still significant uncertainty in the proposed regime because of the lack of co-ordination between the tax rules and the complicated transfer-pricing guidelines.

The Treasury received many objections to the proposals to tighten up the tax regime for the research and development (R&D) tax regime, which critics said was far too onerous in that it set the bar too high. R&D has to be "world beating" for it to qualify for the incentive. The Treasury agreed that this requirement would be removed.

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