While the adoption of the thin capitalisation rule is commendable, this thesis argues that the concomitant use of the thin capitalisation rule with the ‘arm’s length principle’ would be more effective in preventing excess debt that leads to excessive interest deductions. As long as the tax system continues to allow interest on debt to be deductible, the temptation for investors to exploit debt leverage in their capital structure will persist.224 Investors can beat the capitalisation rule by artificially structuring the debt to the maximum allowable ratios. In that case, the inflated, ‘non-arm’s length’ portion of the debt will obviously not be disallowed by the thin capitalisation rule.
It may be argued that both the transfer pricing regulations and general anti-avoidance provision in Section 127 (2) of the TA may be used to redress the situation. The gist of both provisions is that where any transaction is deemed to have been entered into with the aim of avoiding or reducing tax or the main benefit accruing from the transaction was the avoidance or reduction of tax, then appropriate adjustments to counteract the avoidance or reduction of tax can be made by MRA. It is contended that since the idea is to provide clarity and pre-emptively seal existing loopholes against aggressive tax planning practices that are prevalent in the sector, resort to general, discretionary, and retrospective measures like the above should be minimised. An explicitly pre-emptive