Thin capitalisation safe harbour rules: A proposed conceptual legislative design

Abstract

Current legislation in respect of thin capitalisation is viewed as unclear and complex, which has resulted in both the Davis Tax Committee and National Treasury commenting that thin capitalisation safe harbour rules should be investigated for introduction into South African legislation. The aim of this article is to propose a conceptual legislative design for the introduction of thin capitalisation safe harbour rules into South African legislation, for non-complex inbound financial assistance transactions whilst still achieving compatibility with the arm's length principle. The Australian, New Zealand and Canadian thin capitalisation rules were examined to determine in what manner these countries have incorporated thin capitalisation rules into their legislation and to evaluate their compatibility with the arm's length principle. By designing domestic legislation to include specific features for the safe harbour rules, it is possible to introduce safe harbour rules into South African legislation that still achieves compatibility with the arm's length principle. The proposed conceptual legislative design may inform legislative amendment or the practice of the South African Revenue Service.