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Preventing Base Erosion: South Africa’s Interest Limitation Rules

  • Briefing

  • 17 April 2017

This is one in a series of case studies that illustrates the principles of the Natural Resource Charter.

South Africa, like other capital-importing countries, has lost tax revenue from multinational companies’ use of corporate debt financing: foreign companies lend to their South African subsidiaries and deduct interest rates from their taxable income in South Africa. In addition to the commonly used “debt-to-equity ratio” rule, which limits deduction of interests on debt when it represents more than 75 percent of a company’s capital, South Africa introduced an interest limitation rule in 2013. This rule limits the deduction of interests from related party debt to 40 percent of a company’s EBITDA. This case study analyzes how the rule has been implemented in South Africa and how much it helps the country address tax base erosion.