The implementation of two significant tax reforms – a multinational top-up tax and the two-pot retirement system – is that much closer following the publication of four draft Bills for public comment last week.
National Treasury and the South African Revenue Service (SARS) published the Draft Global Minimum Tax Bill, the Draft Global Minimum Tax Administration Bill, the 2024 Draft Revenue Laws Amendment Bill, and the 2024 Draft Rates Bill immediately following the 2024 Budget Speech on 21 February. Interested parties and stakeholders have just over a month to comment.
Together, the amendments will assist in Treasury’s goal of raising an additional R15 billion in taxes via several tax proposals in the face of the country’s increasing budget deficit. This comes amid continued lower revenue performance and higher-than-projected debt-service costs.
During the 2024 Budget Speech, Minister of Finance Enoch Gondongwana said that, in the 2023/24 fiscal year, tax revenue stood at R1.73 trillion – R56.1bn less than what was expected in the 2023 Budget.
Multinational top-up tax
The Draft Global Minimum Tax Bill is aimed at implementing the GloBE Model Rules in South Africa, to enable the country to impose a multinational top-up tax at a rate of 15% on the profits of multinational enterprises (MNEs).
The Draft Global Minimum Tax Administration Bill is aimed at the administration of the Draft Global Minimum Tax Bill.
South Africa was one of the more than 130 countries that agreed during October 2021 to implement a minimum 15% corporate tax rate for MNEs with a global turnover in excess of €750 million. Law firm Cliffe Dekker Hofmeyr explained that this is part of the two-pillar approach that arose out of the Base Erosion and Profit Shifting (BEPS) project of the Organisation for Economic Co-operation and Development (OECD) that aims to end “the race to the bottom” on tax rates that have been published as part of the efforts to tax (although not limited to) the digital economy framework.
The BEPS Project aims to ensure that profits are taxed in the jurisdiction where the economic activities generating such profits are performed.
The Two-Pillar Solution intends to establish a new framework for international tax, as well as a detailed implementation plan. Originally, it was envisaged that the new framework would be implemented by 2023.
- Pillar One aims to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs operating in those countries. An important element in respect of the implementation of Pillar One was the removal of digital service taxes and other similar measures.
- Pillar Two encompasses the imposition of (1) a global minimum tax rate of 15% on specified entities and (2) limited source taxation on certain related party payments that are subject to tax below a minimum rate.
According to a Special Edition discussing the 2024 Budget Speech, CDH noted that Pillar Two has finally been introduced in South Africa.
As of January, 37 countries have adopted legislation to implement Pillar Two. However, the OECD has agreed that the Under Taxed Profits Rule (UTPR) can only become effective in 2025.
The explanatory memorandum to the Global Minimum Tax Bill 2024 states that the GloBE Model Rules are “model rules agreed by the BEPS Inclusive Framework that are designed to be introduced into a jurisdiction’s domestic law and work together with those of other jurisdictions to create a coordinated and comprehensive system of minimum taxation – ensuring that large MNE groups pay a minimum level of tax on their income in respect of every jurisdiction where they operate”.
The GloBE Model Rules were released by the OECD/G20 Inclusive Framework on BEPS in December 2021 and are supported by a commentary, which was released in March 2022.
It is proposed that the multinational top-up tax be imposed under:
- An Income Inclusion Rule (IIR) that taxes the domestic entity of an MNE group on its allocable share of top-up tax arising in respect of the low-taxed income of any foreign group company in which it has a direct or indirect ownership interest; and
- a Domestic Minimum Top-Up Tax (DMTT), which imposes a joint and several tax liability on the domestic entities of an MNE group for any top-up tax arising in respect of low-taxed income of those domestic entities (calculated on an aggregate basis but only with respect to entities located in South Africa).
The tax is designed to follow the GloBE Model Rules and Commentary and to be co-ordinated with the same tax in other jurisdictions with effect from 1 January this year.
Emil Brincker, director and head of CDH’s tax and exchange control practice, said South Africa had chosen for the tax to be levied in South Africa as opposed to the tax being levied in the country of the companies that are effectively low-taxed.
“As expected, South Africa has adopted the general approach in relation to Pillar Two on the basis that the UTPR is not immediately implemented and for South Africa to be able to collect the tax instead of the foreign low-taxed jurisdiction.
“The thrust is thus for the taxes to be paid in South Africa as opposed to in the low-taxed jurisdiction. On this basis it is estimated that more taxes will be collected at a South African level,” said Brincker.
The ‘two-pot’ retirement system
The 2024 Draft Revenue Laws Amendment Bill is aimed largely at clarifying the existing language and simplifying the directives system for both administrators and SARS to allow for an efficient implementation of the two-pot retirement reform.
Treasury is anticipating a tax windfall of about R5 billion when the two-pot retirement system is introduced on 1 September this year.
Read: Treasury anticipates tax windfall from two-pot retirement system
Under the proposed reform, retirement savings will be divided into three parts: the “vested component”, the “savings component”, and the “retirement component”.
The “vested component” comprises retirement savings as of 31 August this year. It’s suggested that a one-time seed capital, equal to 10% of the “vested component” or R30 000, whichever is lower, be allocated from retirement savings to the new “savings component”.
Starting from September 1, retirement contributions will be divided into two portions: one-third to the “savings component” and two-thirds to the “retirement component”.
Members will have the option to withdraw funds from the “savings component” once per tax year, with a minimum withdrawal of R2 000. These withdrawals will be subject to taxation at marginal income tax rates.
In the draft explanatory memorandum on the current amendment Bill, Treasury said despite the changes made in 2023 to enhance the two-pot regime, further adjustments were necessary to clarify the existing language.
To simplify the process for administrators and SARS, Treasury highlighted the need to exclude maintenance awards, taxed under section 7(11) of the Act, from the three components mentioned earlier.
Additionally, to streamline the system and ensure speedy implementation of the reform, Treasury stated that obtaining a directive when transferring the seeding amount from the “vested component” to the “savings component” is not required. This is because tax is only applied when funds are withdrawn from the savings component.
Under technical considerations, it is proposed that:
- Various drafting changes be implemented to enhance clarity and precision in the wording.
- The definitions of the three components be amended to exclude maintenance awards that are taxed under section 7(11) of the Act.
Under intra-fund transfers and directives, it is proposed that reallocations of amounts between the three components not be treated as transfers, and the requirement to obtain a directive for reallocations between the three components be withdrawn.
The proposed amendments will come into effect on 1 September.
Increase in excise duties
The 2024 Draft Rates Bill contains announcements made in Chapter 4 and Annexure C of the 2024 Budget Review that deal with the increase of excise duties. Its purpose is to amend the Customs and Excise Act 1964 and the Carbon Tax Act 2019 to reflect the new rates, commonly referred to as sin tax, on specific goods and services (such as greenhouse gas emissions and alcohol and tobacco products) announced during the 2024 Budget Speech.
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According to Table 3 (Main budget: estimates of national revenue Detailed classification of revenue) published in the 2024 Budget Review, under the new tax proposals “specific excise duties” are expected to raise R58 184 461 in total in the 2024/25 fiscal year.
Deadline to comment
To comment on the four draft Bills, send your feedback to the Treasury’s tax policy depository at 2024AnnexCProp@treasury.gov.za and to SARS at acollins@sars.gov.za by 31 March.
Following the submission of written comments, National Treasury and SARS will hold public workshops to discuss the feedback received.
Later this year, the Standing Committee on Finance and the Select Committee on Finance will also seek public input and hold public hearings on the draft Bills.
Subsequently, a response document summarising the comments received will be presented at parliamentary committee meetings. The draft Bills will then be revised, considering the public feedback and recommendations from the committee hearings, before being formally presented to Parliament for consideration.
