THE South African government expects to collect R8 billion from the global minimum tax in the 2025/26 tax year. The necessary legislation to collect the tax was promulgated at the end of December and the start of this year.
The global minimum tax is part of the two-pillar solution designed by the Organisation for Economic Cooperation and Development (OECD) to address challenges arising from the globalisation and digitalisation of economies.
As international tax laws failed to prevent base erosion and profit shifting because of this changed tax landscape, the OECD released the blueprint for the Pillar One and Pillar Two solution in October 2020.
Hopelessly complicated
Five years down the line, Pillar One seems to be stuttering along.
Many commentators believe the rules are “hopelessly complicated”. Some consider it to be an “undeniable failure” as there is still no consensus on the implementation.
Ruben Johannes, partner and Pillar Two leader for Deloitte in South Africa, believes calling it a failure may be a bit harsh.
“There has been some progress with Pillar One but as noted, perhaps not enough. The work under Pillar Two seems to have overtaken the work done under Pillar One.”
He says only a select few multinational companies will be impacted by Pillar One – notably those whose income exceeds the monetary threshold of €20 billion. However, to get Pillar One over the line there must be consensus from at least 60% of the jurisdictions where the parent companies of the affected multinational enterprise (MNE) are based.
“To date it has not been possible to get consensus. And that is the hold-up for the implementation of Pillar One,” says Johannes.
Pillar One
Pillar One basically has two “workstreams” namely, Amount A and Amount B.
Current international tax laws do not allow a country to impose tax on a foreign company unless it has a physical presence in the country.
Many countries have subsequently been introducing their own digital taxes – each with their own rates and rules.
Amount A tries to find an alternative to the various digital taxes, while Amount B is trying to find a standardised transfer pricing methodology, particularly for marketing and distribution services.
The rules on the transfer pricing methodology were finalised sometime last year.
Pillar Two
Pillar Two also focuses on two workstreams.
The one is the “subject to tax rule” and the other is the “global minimum tax rate” – and it is the latter that has been causing most of the hype.
Johannes explains that the subject-to-tax rule relates to certain intra-group payments such as interest, royalty or insurance payments. In terms of the rule, these payments can be taxed by a country if the company receiving the payments is not subject to tax of at least 9% on the amounts in their own jurisdiction, and they make a profit of at least 8.5% on the payments.
However, this may have very little impact because most African countries already have been withholding taxes on these payments.
SA, for example, has a withholding tax of 15% on interest payments to a foreign entity.
If this rule is to have any effect on preventing base erosion or profit shifting, participating countries (more than 135) must sign the multilateral instrument (MLI). By September 2024 only a limited number of countries had signed it.
The global minimum tax of 15% has been receiving most of the attention under Pillar Two.
The rule seeks to set a minimum tax rate for large MNEs with revenue exceeding €750 million in two of the four years preceding the current year. The calculation is done on a jurisdictional basis, and if the effective tax rate is below 15% in a jurisdiction it must be topped up.
The top-up will only apply to the excess profits earned in that country.
Calculating the “excess profits” is where things again become complicated, says Johannes.
Once established, the tax liability on the excess profits will only be paid to countries who have introduced global minimum tax, and more specifically domestic minimum top-up tax legislation.
Without a domestic minimum top-up tax, that top up on the excess profits will be paid in the parent company’s jurisdiction.
As if things are not complicated enough, there is another “more complex” rule relating to the “under taxed profits”. Due to the complexity of this, its implementation has been deferred.
Compliance burden
In South Africa, the global minimum tax legislation is now reality and affected companies must file global minimum tax returns. Companies with December 2024 year-ends will file their first return in 2026.
Johannes warns that the compliance burden should not be underestimated.
The legislation caters for penalties on non-compliance of around R150 000 per month – for each company in the group.
He notes that National Treasury and the South African Revenue Service are aware of the complexities and the challenges they face. They are in the process of building capacity and getting the necessary processes in place. – moneyweb.co.za
