The relationship between transfer pricing adjustments and withholding tax on interest in South Africa
In response to base erosion and profit shifting activities, section 31 of the Act was enacted to prevent profit shifting and base erosion brought about by the manipulation of cross-border transfer pricing practices carried out by multinational enterprises. To further protect South Africa's tax base, a withholding tax was introduced from 1 March 2015 on interest payments made to non-residents. The objective of this study is to determine whether the tax consequences of an interest payment that is subject to a transfer pricing adjustment and a withholding tax on interest, is equitable against the base erosion and profit shifting background. The doctrinal methodology is used to conduct the research by analysing and comparing the South African legislation on transfer pricing and withholding tax on interest to the recommended practice outlined in the OECD and UN guidelines. A cross-national comparison with Morocco and Kenya is performed, to reach a conclusion on the equitability of these two provisions that are used to curb base erosion and profit shifting activities. Based on the analysis of South Africa's tax legislation and the recommended practice of the OECD and UN, it appears that by subjecting the non-arm's length interest to both interest and dividends withholding tax, the South African legislation in this regard seems to be less equitable due to the resulting double taxation. Similar to South Africa, the non-arm's length interest is subject to both dividends and interest withholding tax in Morocco, resulting in a possible double taxation. Due to the fact that in Kenya, the secondary transfer pricing adjustment in the form of a deemed dividend was only enacted in September 2018, literature was not available to determine whether the non-arm's length interest in Kenya is subject to both interest and dividends withholding tax.