PILLAR II: South Africa’s Global Minimum Tax Act - Implications for Multinationals

South Africa has officially gazetted the Global Minimum Tax Act, 2024, marking a milestone in its alignment with the OECD's Pillar Two framework under the Base Erosion and Profit Shifting (BEPS) project. The Act introduces a global minimum tax rate of 15%, targeting large multinational enterprises (MNEs) with consolidated annual revenues exceeding EUR 750 million. This landmark legislation aims to combat tax avoidance and ensure that MNEs contribute a fair share of taxes in jurisdictions where they operate.

Core Provisions of the Global Minimum Tax Act

The Act incorporates the Income Inclusion Rule (IIR) and Undertaxed Payment Rule (UTPR) to address profit-shifting and low-tax jurisdictions. It also includes provisions for:

• Qualified Domestic Minimum Top-Up Tax: Ensures a consistent application of the minimum tax within South Africa.
• Administrative Compliance: Mandates MNEs to file the GloBE Information Return, providing transparency on their global tax positions.

Key Documents Supporting the Act

Global Minimum Tax Act, 2024 (Gazetted Law):

• Establishes the legal framework for imposing a top-up tax on MNEs to meet the global minimum tax requirements.
• Incorporates the OECD’s Global Anti-Base Erosion (GloBE) Model Rules.
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Global Minimum Tax Bill:

• Introduced to the National Assembly in February 2024, this draft legislation lays out the core principles of the GloBE Rules and provides detailed definitions and mechanisms for implementation.
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Global Minimum Tax Administration Bill:

• Supplements the main Act by defining the administrative procedures for compliance, including filing obligations, deadlines, and penalties.
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OECD GloBE Model Rules:

• A global template guiding the implementation of minimum tax rules, ensuring uniformity across jurisdictions.
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OECD Commentary and Administrative Guidance:

• Detailed guidelines addressing tax challenges from digitalization, including the interpretation and application of GloBE Rules.
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Implications for South Africa

This legislation positions South Africa as a proactive participant in global tax reform, enhancing its ability to curb tax base erosion and profit shifting. The Act strengthens the country’s fiscal framework while signalling its readiness to cooperate in the global effort for fair taxation.

But how is this going to affect multinationals doing business in South Africa?

1. Increased Tax Compliance Obligations

• MNEs will need to adhere to enhanced reporting requirements under the GloBE Information Return mandated by the Global Minimum Tax Administration Bill.
• Compliance with the Income Inclusion Rule (IIR) and Undertaxed Payment Rule (UTPR) will require robust tax planning, documentation, and financial reporting systems.
• Additional resources may be needed to navigate the administrative provisions of the Act.

2. Higher Effective Tax Rates

• The 15% global minimum tax ensures that MNEs with operations in South Africa pay at least this rate on their profits. This could increase the effective tax burden for MNEs utilizing low-tax jurisdictions.
• Any profits taxed below the threshold in other jurisdictions will be subject to a top-up tax in South Africa.

3. Impact on Cross-Border Tax Structures

• MNEs employing cross-border tax planning strategies may need to reconsider structures that rely on base erosion and profit shifting to low-tax jurisdictions.
• South Africa’s adoption of the GloBE Rules limits the effectiveness of such strategies by applying a jurisdictional top-up tax.

4. Competitive Positioning

• For MNEs with global operations, the uniform application of the GloBE Rules reduces disparities in tax liabilities across jurisdictions, creating a more level playing field.
• However, MNEs with complex structures might face disadvantages compared to simpler, domestically focused competitors.

5. Operational and Strategic Adjustments

• Restructuring Tax Functions: MNEs may need to reevaluate their organizational structures, ensuring compliance while maintaining operational efficiency.
• Increased Costs: MNEs must account for the potential rise in administrative costs due to reporting and monitoring requirements.

6. Transparency and Risk Management

• The mandatory filing of the GloBE Information Return introduces greater transparency in tax matters, potentially exposing MNEs to tax audits and scrutiny from revenue authorities.
• MNEs will need to strengthen their tax governance and risk management frameworks to mitigate exposure to penalties and disputes.

7. Alignment with Global Standards

• Compliance with South Africa’s new legislation aligns MNEs with the OECD’s global standards, easing tax management in other jurisdictions that are adopting similar measures.
• MNEs may benefit from safe harbours and relief measures if their operations align with the Act’s provisions.

8. Strategic Tax Planning

• MNEs operating in South Africa must revisit tax strategies to assess the impact of the Qualified Domestic Minimum Top-Up Tax, ensuring optimal tax positions across their global footprint.
• Incorporating substance-based income exclusions into tax planning could mitigate additional tax liabilities.

The gazetting of the Global Minimum Tax Act, 2024, supported by comprehensive administrative bills and international guidelines, underscores South Africa’s commitment to tax equity and transparency. This pivotal reform aligns the nation with global standards.

Pillar Two: Overview and Relevance in the Context of South Africa’s Global Minimum Tax Act

Pillar Two is a cornerstone of the OECD/G20 Base Erosion and Profit Shifting (BEPS) initiative, specifically addressing global tax challenges arising from digitalization and profit shifting. It introduces the Global Anti-Base Erosion (GloBE) Model Rules, aimed at ensuring that large multinational enterprises (MNEs) pay a minimum effective tax rate (ETR) of 15% on their profits, regardless of where they operate.

Key Features of Pillar Two

1. Minimum Effective Tax Rate (15%):Pillar Two mandates that MNEs with consolidated annual revenues above EUR 750 million pay at least 15% tax on profits in every jurisdiction.If profits are taxed below this threshold in a jurisdiction, a top-up tax can be applied in another jurisdiction.
2. Two Core Rules:Income Inclusion Rule (IIR): This applies at the parent entity level, requiring it to pay additional tax on profits of low-taxed subsidiaries.Undertaxed Payment Rule (UTPR): Acts as a backstop by allocating the top-up tax among jurisdictions where the MNE operates if the IIR is not applied.
3. Subject-to-Tax Rule (STTR):Allows source countries to impose a withholding tax on certain payments (e.g., interest and royalties) if taxed below the agreed rate.
4. Administrative Guidance:Provides a framework for filing obligations, safe harbours, and dispute resolution, ensuring consistent application of rules.

Relevance to South Africa’s Global Minimum Tax Act

1. Alignment with OECD Standards

South Africa’s Global Minimum Tax Act directly incorporates the GloBE Rules, positioning the country as a proactive participant in global tax reform. This alignment:

• Ensures that MNEs operating in South Africa adhere to a minimum 15% tax rate.
• Demonstrates South Africa's commitment to international cooperation on tax matters.

2. Protecting the Tax Base

Pillar Two addresses the issue of base erosion and profit shifting, where MNEs artificially shift profits to low-tax jurisdictions to reduce tax liabilities. By implementing the IIR and UTPR, South Africa ensures that profits derived within its borders are taxed fairly, safeguarding its tax base.

3. Enhancing Tax Equity

The Act levels the playing field by eliminating the advantages previously enjoyed by MNEs using low-tax jurisdictions. This fosters fair competition among businesses operating in South Africa.

4. Administrative Framework

The administrative provisions of Pillar Two, such as the GloBE Information Return, provide a clear roadmap for MNEs to comply with reporting and payment obligations. South Africa’s adoption of these provisions ensures transparency and reduces the risk of tax disputes.

5. Impact on Multinationals

Pillar Two’s top-up tax mechanism means that MNEs operating in multiple jurisdictions must review their global tax strategies to comply with South Africa’s framework. It ensures that MNEs cannot escape taxation by leveraging inconsistencies between jurisdictions.