Interest deductions on foreign debt: Please remove the elephant in the room

The Budget states that there will be some changes to section 23M. This section is a fairly complex piece of legislation, which could limit your interest deduction for tax purposes.

It would usually apply when the SA company borrows funds from its related offshore group company (there are other scenarios).

Per a recent amendment, when checking which “interest” may be disallowed, the section was amended and unfortunately (in my view) expanded to include certain foreign exchange losses as “interest”.

One usually has some control of the interest you will be paying but very little control over your foreign exchange gains or losses, being subject to the whims of the market.

The Budget acknowledges that including foreign exchange losses creates complexity and states that interest will now simply (in broad terms) be interest without foreign exchange losses.

Unfortunately, the Budget continues to discuss foreign exchange gains, stating that their treatment is unclear in certain cases, and it will be clarified.

The linking of the above two proposals creates some uncertainty. We were hoping that all references to foreign exchange gains and losses would be removed and decrease the acknowledged complexity.

On the same topic, section 23M, along with transfer pricing provisions, can limit interest deductions. The further complexity is determining which to apply first, the transfer pricing provisions or indeed section 23M.

There is certainly room for debate, with SARS of the view that transfer pricing is to be applied first. We fail to see why Treasury does not remove the debate and uncertainty and legislate which section is applied first. Please remove the elephant in the room!