The taxation of company distributions in respect of hybrid instruments in South Africa : lessons from Australia and Canada
Abstract
Tax legislation traditionally distinguishes between returns on
investment paid on equity and debt instruments. In the main,
returns on debt instruments (interest payments) are deductible
for the paying company, while distributions on equity instruments
(dividends) are not. This difference in taxation can be exploited
using hybrid instruments and often leads to a debt bias in
investment patterns. South Africa, Australia and Canada have
specific rules designed to prevent the circumvention of tax
liability when company distributions are made in respect of
hybrid instruments. In principle, Australia and Canada apply a
more robust approach to prevent tax avoidance and also tend to
include a wider range of transactions, as well as an unlimited
time period in their regulation of the taxation of distributions on
hybrid instruments. In addition to the anti-avoidance function, a
strong incentive is created for taxpayers in Australia and Canada
to invest in equity instruments as opposed to debt. This article
suggests that South Africa should align certain principles in its
specific rules regulating hybrid instruments with those in
Australia and Canada to ensure optimal functionality of the
South African tax legislation. The strengthening of domestic tax
law will protect the South African tax base against base erosion
and profit shifting through the use of hybrid instruments.
Collections
- PER: 2021 Volume 24 [71]
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