Original Research

An evaluation of interest deduction limitations to counter base erosion in South Africa

Pieter van der Zwan, Daniel P. Schutte, Waldo Krugell
South African Journal of Economic and Management Sciences | Vol 21, No 1 | a1816 | DOI: https://doi.org/10.4102/sajems.v21i1.1816 | © 2018 Pieter Van Der Zwan, Daniel P. Schutte, Waldo Krugell | This work is licensed under CC Attribution 4.0
Submitted: 06 March 2017 | Published: 30 July 2018

About the author(s)

Pieter van der Zwan, School of Accounting Sciences, North-West University, South Africa
Daniel P. Schutte, School of Accounting Sciences, North-West University, South Africa
Waldo Krugell, School of Economics, North-West University, South Africa


Background: The Organisation for Economic Cooperation and Development (OECD) made a number of recommendations in relation to interest deduction limitations as part of the Base Erosion and Profit Shifting (BEPS) project. In 2016 the South African National Treasury indicated that the interest deduction limitations contained in the Income Tax Act would be reviewed in the light of these recommendations.


Aim: This paper aimed to describe funding structures of companies in South Africa liable for tax and how this relates to other characteristics, including ownership, of the companies.


Setting: The research was performed using data from tax returns submitted by companies liable for income tax in South Africa.


Methods: This paper reports on descriptive analyses of the research conducted.


Results: The results showed that the mean interest-to-earnings before interest, taxes, depreciation, and amortisation (EBITDA) ratio for certain foreign-owned entities differed significantly from that of domestically owned entities.


Conclusion: The results may present evidence of profit-shifting activities. They also highlight trends in interest-to-EBITDA ratios that may be of relevance for future legislative developments. Further related research is required if interest deduction limitations in the South African tax legislation are to be reviewed in light of the OECD proposals.


interest deduction limitation; interest-to-EBITDA ratio; profit shifting; South Africa


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