This is one in a seriesof 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.