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South Africa Rethinks Intra-Group Anti-Avoidance Rules

by Lorys Charalambous,, Cyprus

08 August 2011

The South African Revenue Service (SARS) and the National Treasury have proposed a new short-term solution for businesses that have problems with the proposed anti-avoidance measures that are to be inserted into the 2011 Taxation Laws Amendment Bill and are intended to ensure the free movement of tax-neutral assets between members of a corporate group.

The government has been concerned about the use of Section 45 of the country’s tax code as a tax-free mechanism to obtain interest deductions linked to excessive debt (and other hybrid instruments masquerading as debt) in facilitating, for example, leveraged buyouts and other restructuring.

SARS and the National Treasury suspended the operation of Section 45 in June this year for an 18-month period, in order, it was said, to protect tax revenues from a potential loss of between ZAR3bn (USD437.5m) and ZAR5bn.

The government then announced an accelerated consultation process on the proposed anti-avoidance measures. While reiterating their commitment to the rollover relief provisions and the need to ensure that “non-cash out” mergers and acquisitions should ideally be free from an immediate tax charge, they confirmed that seemingly neutral transactions cannot be condoned if these transactions set the stage for future tax losses (or other tax benefits) via excessive leverage.

A short, accelerated consultation period was held until July 8, but was said to have merely confirmed the opinion of SARs and the National Treasury that controls were needed on excessive debt. However, given the additional information therein provided, a solution is now being proposed for the short term.

It is hoped that the short-term solution “should better accommodate the pressing needs of the business community while simultaneously providing effective interim protection for fiscus. Commercially orientated transactions must be allowed to proceed as long as such transactions do not contain unacceptable tax leakage.”

It is proposed that a section be introduced to control the interest deductions associated with debt used to fund the acquisition of assets. Transactions will follow different channels, in that, for example, interest deductions arising from transactions in a ‘green’ channel, where there is no revenue loss (or the possibility of loss) will be automatically permissible.

Interest deductions on associated debt for so-called ‘amber’ transactions will only be permitted upon pre-approval, and transactions that are not approved will not be permitted an interest deduction. This approach, it was pointed out, is guided by the need to reduce administrative burdens for most legitimate transactions.

It was reiterated that the government’s goal was never to impede commercially-drive transactions, but merely to prevent certain taxpayers and their advisors from exploiting weaknesses in the tax system.

A longer-term set of solutions to deal with excessive debt and the characterisation of debt is still planned for 2012 and beyond. The government remains committed to allowing the use of Section 45 to facilitate the tax neutral movement of assets between members of a group of companies, which do not give rise to artificial structuring to avoid paying taxes, but SARS will, in the meantime, “continue to investigate a number of pre-existing aggressive transactions that deliberately avoid paying their fair share of the tax burden.”

A comprehensive report in our Intelligence Report series describing how to get an optimal blend of tax-efficiency and profits from global manufacturing operations through judicious use of offshore and onshore techniques, and showing how the corporate supply chain is full of opportunities to save tax while optimising efficiency, is available in the Lowtax Library at and a description of the report can be seen at
TAGS: South Africa | compliance | tax | business | tax compliance | law | mergers and acquisitions (M&A) | corporation tax | legislation | regulation | legislation amendments | Africa

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