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Impact of China’s investment on the South African tax base

Wednesday, 03 October 2018   (0 Comments)
Posted by: Author: Peter Dachs
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Author: Peter Dachs (ENSafrica)

The news that China has committed to invest approximately R200-billion in South Africa was greeted with much fanfare throughout the country. Approximately ZAR33-billion of this will constitute a loan to Eskom, which is particularly good news given the funding requirements of the entity. A loan will also be advanced to Transnet in the amount of ZAR4-billion.

However, we should be very clear that this is a business deal for China, which will want to receive an arm’s length return for the various loans from the China Development Bank and the Industrial and Commercial Bank. It will therefore be interesting to see what interest rate is proposed for the various loans and, in particular, in respect of the loans to Eskom given the company’s poor credit rating. The interest charged on these loans has not been made public, however, we know that the Eskom loan has a term of fifteen years and the Transnet loan a term of five and a half years. 

From a South African tax perspective, given the magnitude of the investment, this will have a significant impact on South Africa’s tax base given that it seems these loans will be made to South African taxpayers including Eskom and Transnet.  
In terms of South African tax law, interest is tax deductible on a yield to maturity basis, provided that the borrower is carrying on a trade and the interest is incurred in the production of income for the borrower. 

Therefore, interest on loans to, for example, fund working capital or acquire capital assets, should be tax deductible for the borrower. Of course, for taxpayers such as Eskom, the deduction would simply increase their assessed loss for tax purposes, thereby postponing the time until they return to tax paying status. 

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