Income Tax (Restriction on Deductibility of Interest) Rules amended to reframe qualifying deduction definition

30 March 2022

The Income Tax (Restriction on Deductibility of Interest) (Amendment) Rules 2022 (“Amendment Rules”) came into operation on 1 February 2022. It follows from the amended Income Tax (Restriction on Deductibility of Interest) Rules 2019 (“Principal Rules”) which came into effect on 1 July 2019.

The Principal Rules, inter alia, restrict the amount of interest that can be deducted by specified persons who have been granted financial assistance in a controlled transaction. “Controlled transaction” is defined in section 140C(3) of the Income Tax Act 1967 (“Act”) as “financial assistance between persons one of whom has control over the other, or between persons both of whom are controlled by some other person”.

Rule 5 of the Principal Rules provides the formula to ascertain a base amount known as the “tax-EBITDA” of a person, which is required to determine the maximum amount of interest that can be deducted. Pursuant to the Amendment Rules, the definition of “qualifying deduction” under Rule 5(2) of the Principal Rules has been substituted with:

• where a business expenditure incurred in the profit and loss account is allowed as a deduction under the Act and the amount of the deduction allowed exceeds the amount of the business expenditure incurred, an amount equal to the difference between the amount of the deduction allowed and the amount of the business expenditure incurred in the profit and loss account; or
• where there is no business expenditure incurred in the profit and loss account, the amount of deduction allowable under the Act.

The scope of Rule 6(1) of the Principal Rules that allows a company to carry forward any interest expense exceeding the amount ascertained under Rule 4 of the Principal Rules to subsequent years of assessment has also been expanded pursuant to the Amendment Rules and now applies to any person.

The Amendment Rules further clarifies that the condition in Rule 6(2) of the Principal Rules (i.e. for the shareholding of a company to remain substantially the same on the first day and the last day of the basis period for the year of assessment following the year in which such amount was ascertained) only applies to a company and not to other persons who are allowed to carry forward excess interest under Rule 6(1) of the Principal Rules.