On Christmas Eve last year, while most were wrapping presents, President Cyril Ramaphosa was busy unwrapping a major win for the South African Revenue Service (SARS). By signing the Global Minimum Tax Act into law, he delivered a gift that promises to keep on giving – starting with a potential R8 billion boost to the country’s corporate income tax base by 2026/2027.
Minister of Finance Enoch Godongwana first indicated in the 2024 Budget Review on 21 February last year that South Africa would be implementing the global minimum tax “commencing on or after 1 January 2024”. This coincided with the publication of the Draft Global Minimum Tax Bill and the Draft Global Minimum Tax Administration Bill for public comment. These draft Bills were sent to the National Assembly on 30 October 2024.
Read: New tax reforms edge closer: public comment open on four draft Bills
The proposals contained in the Draft Global Minimum Tax Bill followed the Global Anti-Base Erosion (GloBE) Model Rules and Commentary. The GloBE Model Rules were released by the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) in December 2021 and are supported by a Commentary, released in March 2022.
The GloBE Model, also known as the global minimum tax, provides for a coordinated and comprehensive system of minimum taxation, aimed at ensuring that large multinational enterprise (MNE) groups pay a minimum level of tax on their income in respect of every jurisdiction in which they operate. It is labeled as “one of the biggest-ever reforms” to international corporate tax rules.
These rules aim to restrict the methods multinationals use to shift profits from high-tax to low-tax jurisdictions. In doing so, they seek to curb the “race to the bottom” in corporate tax rates, where countries compete to attract income by offering reduced tax rates and incentives.
As of 28 May 2024, over 145 countries and jurisdictions are members of the OECD/G20 Inclusive Framework on BEPS, including 14 observer organisations.
The Two-Pillar Solution intends to establish this 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 the WTS Global Country–by–Country Implementation Status, 36 countries (37 if you now include South Africa) have adopted Pillar Two legislation by 16 December last year with draft legislation in process in another eight countries.
South Africa has chosen to collect the tax domestically, rather than relying on the low-tax countries where some multinational companies are based. This approach is expected to bring in more tax revenue for South Africa.
An article on AfricaLogistics highlights several potential benefits of South Africa’s adoption of the 15% global minimum tax rate. Economically, it could reduce reliance on personal income and indirect taxes by boosting corporate tax revenue.
Socially, the law aims to create a fairer tax system by levelling the playing field between multinational corporations and smaller local businesses.
That said, concerns persist about enforcement and the risk of companies relocating to regions with more favourable tax regimes. However, the OECD agreement is expected to mitigate this by preventing any country from undercutting the global minimum rate.
How it will work
The government proposes to introduce two measures to effect this change – an income inclusion rule and a domestic minimum top-up tax – for qualifying multinationals (effective from 1 January 2024).
The income inclusion rule will enable South Africa to apply a top-up tax on profits reported by qualifying South African multinationals operating in other countries with effective tax rates below 15%.
The domestic minimum top-up tax will enable SARS to collect a top-up tax for qualifying multinationals paying an effective tax rate of less than 15 % in South Africa.
To ease the transition, the Global Minimum Tax Act (Sections 17-19) provides for a “transition year”.
This period gives multinational enterprises (MNEs) time to adjust their tax structures and align with the GloBE rules before any liabilities come into effect.
Implications for MNEs operating in South Africa
In an interview with SABC News, Professor Deborah Tickle, a senior lecturer at UCT, chartered tax advisor, and member of the South African Institute of Tax Practitioners and International Business Tax Work Group, discussed the implications of the global minimum tax for multinational enterprises (MNEs) operating in South Africa.
According to Tickle, the next step for MNEs is to determine the tax rate in South Africa and in the countries where they operate, especially if their head office or parent company is based in South Africa.
She explained: “If that tax rate is lower than 15% on the gross income, then, after some deductions which take into account certain activities, an additional amount of 15% is paid.”
Tickle further clarified that the 15% top-up tax can either be paid by the ultimate parent entity – a category that includes about 44 global companies in South Africa – or, as South Africa has chosen to do, the country ensures that local subsidiaries of global companies pay the tax.
“South Africa will make sure that companies that are members of global entities are paying that 15% within our country if they are operating in our country and paying less than the 15%,” she said.
This approach, she noted, prevents South Africa from losing out on tax revenue.
A game-changer for corporate taxation
South Africa’s corporate tax rate currently stands at 27%. However, Tickle noted that many multinational entities are structured in a way that allows them to operate in countries where the tax rate is significantly lower than 15%.
“And quite a lot lower, or they’re subject to certain incentives,” she explained.
Tickle said it is these types of multinational businesses that will be directly impacted by the new Global Minimum Tax Act.
“One could give an example of Apple, which we know has been paying a lot less than an effective rate of 15% for many years, and so have a number of its peers. So it would be those kinds of companies that will suddenly find themselves paying more tax than they used to,” she said.
SARS will focus on MNE groups with headquarters in South Africa.
“So we will be looking at the companies that local headquartered companies own, and see what they’re paying. And then other companies that have subsidiaries in our country, if those subsidiaries collectively are paying less than 15% tax, then they will be subject to the 15% here, and this is where the R8 billion that has been mentioned by [National] Treasury is supposed to be coming from,” Tickle explained.
According to the OECD, around 80% of tax of global revenue is generated by 20% of the companies in the world. In other words, Tickle explained, it is a small group of companies that are easy to monitor.
“They’re very well organised, and so their tax departments have organised themselves to be able to pay these taxes, and the idea is that we will obviously benefit, along with other countries where lower taxes are being paid.”
Ahead of the curve
Historically, South Africa has been quick to adopt recommendations from the OECD, often ahead of many other nations.
“We implemented transfer pricing very early, and we’ve implemented controlled foreign company rules very early. And these are international tax concepts,” said Tickle.
This time with the Global Minimum Tax Act, South Africa has once again positioned itself as a trailblazer in implementing international tax reforms.
“We were one of the first, along with Canada and Australia, who implemented [Pillar Two] with effect from 1 January 2024,” she explained.
Tickler noted that this collaboration between the over 145 countries who have signed up for the OECD’s Inclusive Framework represents a remarkable moment in global tax history, where countries are working in sync to apply standardisd rules.
“And these 145 countries are not all signed up for what they call pillar two, which is this minimum tax, yet, but there are very many that already have, and there are very many that will very soon do so. So we are ahead of the curve in some respects.”
