Page 1119 - SAIT Compendium 2016 Volume2

EXPLANATORY MEMORANDUM ON THE TAXATION LAWS AMENDMENT BILL, 2015
However, it has been noted that the policy intention to accommodate these tax-deferred debt- push-down structures is not clearly expressed in the text of the current legislative provisions, which may lead to the abuse of the special deduction. Of great concern is the potential of allowing a full interest deduction on the acquisition of a controlling group company in relation an income producing company that derives a large portion of its value from the non-income producing fellow subsidiaries of an income producing company. In addition, the indirect acquisition of an operating company through its controlling group company can be abused to obtain an interest deduction on the shares acquisition of a minority stake in an operating company.
Debt-drop-down acquisitions in companies that do not generate income and the acquisition of minority shareholdings in income producing operations would not have quali ed for the tax- deferred debt-push-down structures that the special interest deduction is intended for. This is because an interest deduction can only be claimed in respect of debt used to acquire income producing assets and section 45 only provides for a tax deferral in instances where the acquirer becomes a controlling group company in relation to the target company at the end of the day of the intra-group transaction.
III. Proposal
To align the current special interest deduction in respect of debt used to acquire controlling share interests to the underlying policy objectives the following is proposed:
A. Amendment to the de nition of an operating company
It is proposed that an operating company should, in providing goods and services, generate amounts that constitute income in its hands in order to counter schemes where a full interest deduction is claimed for minimal income producing operations. An operating company’s receipts and accruals in a year of assessment will now be required to consist of at least 80 per cent income generated from carrying on business continuously through the sale of goods or the rendering of services. In addition, a controlling group company in relation to an operating company will no longer be automatically considered as an operating company.
B. Amendment of the de nition of an acquisition transaction
It is proposed that an acquisition transaction for purposes of the special interest deduction will now encompass the acquisition of an equity share by a company in–
1. an operating company, which thereafter becomes a controlling group company in relation to that operating company
and they form part of the same group of companies as de ned in section 41(1); or
2. a controlling group company in relation to an operating company that forms part of the same group of companies
as de ned in section 41(1) as that operating company. Similarly, it will also be required that the acquiring company should as a result of the acquisition transaction, become a controlling group company in relation to that controlling group company and form part of the same group of companies as de ned in section 41(1).
C. Share interests qualifying for a special interest deduction
In order to limit the special interest deduction to share acquisitions in income generating operating companies, it is proposed that share interests that qualify for the special interest deduction should be determined with reference to the effective shareholding of the acquired company in an operating company. In this regard, share interests that qualify for the special interest deduction will be determined as follows:
1. In the instance of a direct acquisition of equity shares in an operating company, the qualifying share interest will be those acquired equity shares in that operating company. As such, interest on debt used to fund the direct acquisition of equity shares in an operating company will be deductible subject to the provisions of section 23N.
2. In the instance of an indirect acquisition of equity shares in an operating company (i.e. the acquisition of the equity shares in a controlling group company in relation to an operating company), the qualifying interest will be determined with reference to the value of such equity shares that is derived from the underlying operating companies with which the controlling group company acquired forms part of the same group of companies as de ned in section 41(1). In such an instance the interest on only the portion of debt used to fund such a qualifying share interest will be deductible subject to the provisions of section 23N.
However, as a way to accommodate bona de and non-erosive indirect acquisitions of largely productive operations, where at least 90 per cent of the value of the equity shares of a holding company that is being acquired is derived from an equity share held by that company in an operating company, 100 per cent of the interest expense will be allowed on debt use to acquire the equity share of such a company.
D. Redetermination of share interests qualifying for a special interest deduction
It is proposed that where future reorganisations of any of the operations that were taken into account in determining the share interests qualifying for a special interest deduction are undertaken, a redetermination of the share interest qualifying should be done. Only the interest on the portion of debt used to fund the redetermined qualifying share interest will be deductible as if the acquisition transaction was entered into on the date of that reorganisation event. In this respect, it is proposed that a redetermination of the qualifying share interest for purposes of the special interest deduction should be redetermined when –
1. a controlling group company ceases to be a controlling group company in relation to any operating company;
2. an operating company ceases to be an operating company; or
3. any company ceases to form part of the group of companies as de ned in section 41(1) in relation to an operating
company or a controlled group company in relation to an operating company.
E. Consequential amendments to interest limitation provisions
In order to align the proposed scenarios under which an acquisition transaction may be entered into with the interest limitation provisions that limit the interest deductions arising in respect of reorganisation and acquisition transactions,
SAIT CompendIum oF TAx LegISLATIon VoLume 2 1111