Abstract
This study investigates whether the “hybrid debt instrument” or “hybrid interest” rules enacted in the Act in Sections 8F and 8FA of the Act, have alignment and are in coherence with the definition of “dividends” within the network of South African tax treaties, which were negotiated and drafted along the OECD MTC. It is to be borne in mind that the effect of Section 8F and 8FA is to re-characterize an interest flowing from a hybrid debt instrument into a dividend-in-specie. The provisions relating to “hybrid debt instruments” and “hybrid interest” as contained in section 8F and 8FA seek to identify and provide for specific tax treatment of certain debt instruments that contain equity-like features. This study highlights and discuss challenges faced by taxpayers in the application of Section 8F and 8FA in a cross-border context, in determining the tax implications of these funding instruments. This is where the conflict between domestic law and tax treaty is found. The findings of the study indicate that there is a conflict of qualification or classification i.e., it is not clear whether the yield on these fundings instruments will be classified as “dividends” or as “interest” for the purposes of tax treaty classification. As a result of this conflict, foreign investors are likely to experience uncertainty regarding their tax obligations under these circumstances and may have difficulty planning their taxes. This uncertainty and lack of clarity contrast with the principles of an effective tax system and do not help build a conducive investment climate for foreign direct investment and economic growth. The study further looks at conflict resolution mechanisms, namely, judicial precedents on matters dealing with the interpretation of tax treaties as well selected South African tax treaties. This is where the study discusses alternatives solutions to address the current research problem and concludes by making recommendations to the SARS and to the National Treasury.
Key Words: “hybrid debt instruments”, “taxation of financial instruments”, “taxation of hybrid debt instruments”, “debt and equity instruments”, “corporate rights”, “contractual rights on financing”, “conflict of qualification”, “conflict resolution” and “certainty on tax policy”