Page 87 - SAIT Compendium 2016 Volume2

PN 2/1996 Income Tax acT: PracTIce noTes
Section 31 (3) is not applicable as the interest-bearing nancial assistance granted
falls within the 3:1 guideline.
Calculation of excessive interest in terms of section 31 (2)
Interest falling within the 3:1 guideline Weighted average of nancial assistance: R2 000 000 for 147 days
R4 000 000 for 219 days
Effective interest rate of acceptable nancial assistance
PN 2/1996
Excessive interest relating to the 1995/6 year of assessment is Rnil as the 20.5% [18.5% + 2% (see 2.2 below)] limit has not been exceeded.
2. Section 31 (1) and (2)
2.1 The scope of subsections (1) and (2) is limited to an ‘international agreement’ as de ned. A transaction, operation or scheme quali es as an international agreement where such agreement has been entered into between—
a natural person ordinarily resident in the Republic or a person other than a natural person managed or controlled in the Republic (hereinafter referred to as a resident); and
a natural person not ordinarily resident in the Republic or a person other than a natural person managed or controlled outside the Republic (hereinafter referred to as a non-resident).
Furthermore, paragraph (c) of the de nition of ‘services’ in section 31 (1) encompasses the granting of nancial assistance, including a loan, advance or debt and the provision of any security or guarantee.
2.2 Where in terms of section 31 (2) a service, speci cally the granting of nancial assistance, is provided by a non-resident to a resident who is a connected person in relation to the non-resident and the consideration relating to the nancial assistance is excessive in the sense that the consideration does not re ect an arm’s length price, the Commissioner may, in the determination of the taxable income of the resident, adjust the consideration in the hands of the resident to an arm’s length consideration in relation to the nancial assistance granted. Consideration, in the context of nancial assistance, will be interpreted to include not only interest or related nance charges, but also a discount or premium. Where the loan, advance or debt is denominated in rand, a rate not exceeding the weighted average of the relevant interbank rate plus 4 percentage points will be an acceptable nominal interest rate. Any interest exceeding the above-mentioned prescribed rates will be regarded as excessive interest and will consequently not be allowed as a deduction for income tax purposes.
3. Section 31 (3)
Section 31 (3) was introduced speci cally to address thin capitalisation transactions between certain related parties. The provisions of this section will apply where nancial assistance is granted directly or indirectly by a non-resident of the Republic (the investor) to—
(a) a resident (the resident) of the Republic who is a connected person in relation to the investor; or
(b) a person other than a natural person who is managed or controlled in the Republic (the recipient) in whom the
investor has a direct or indirect interest by virtue of which the investor is entitled to participate in 25% or more of the dividends, pro ts or capital of the recipient or is entitled to exercise, directly or indirectly, 25% or more of the voting rights of the recipient.
Where in terms of such an agreement the Commissioner is satis ed that the nancial assistance granted by the investor to the resident or the recipient is excessive in relation to the xed capital of the resident or recipient, any interest relating to the excessive portion of the nancial assistance shall be disallowed as a deduction in the hands of the resident or recipient.
4. Determination of ‘disallowable interest’ relating to excessive nancial assistance
4.1 As a general guideline, the Commissioner will not apply the thin capitalization provisions contained in section 31 (3) where the nancial assistance/ xed capital ratio does not exceed 3:1. The excessive portion of nancial assistance granted by an investor will, therefore, be that portion of the nancial assistance which exceeds an amount equal to three times the xed capital of the resident or recipient of the nancial assistance. This approach will ensure a degree of continuity as it will, to some extent, correspond with the current practice of the Exchange Control Authorities. The interest (interest, nance charge or other consideration including inter alia a discount or premium) in relation to or in respect of nancial assistance shall be apportioned between the amount of nancial assistance which is considered to be acceptable and the amount of nancial assistance which is regarded as excessive. In order to determine which portion of interest relates to excessive nancial assistance in relation to an investor in respect of a year of assessment, the following formula will be applied:
in which formula—
A=B3_C_–__D_ C
= R480 000
294 000 000
876 000 000 1 170 000 000 ÷ 366 = R3 196 721
= R480 000 ÷ R3 196 721 = 15%
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