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South Africa has implemented the Global Minimum Tax Act in a move to curb tax avoidance by multinational giants and secure its share of global tax revenue.
The Act, gazetted by the President on December 24, 2024, and backdated to take effect from January 1, 2024, marks a significant shift in the country’s tax landscape.
The law adopts the GloBE (Global Anti-Base Erosion) Rules developed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting.
These are designed to enforce a minimum 15% effective tax rate on the foreign income earned by multinationals to try to ensure that multinational corporations contribute their fair share of taxes in the countries in which they conduct business.
It also looks to curb “tax competition,” a practice where nations reduce corporate tax rates to lure in investments.
About 138 countries and jurisdictions agreed to introduce the GloBE rules, including South Africa, whose implementation of this is seen through the Global Minimum Tax Act.
At the heart of the Act lies the introduction of a “Top-up Tax” on the profits of in-scope multinational enterprise (MNE) groups with a global turnover exceeding €750 million.
This means even if an MNE’s operations in South Africa have a low effective tax rate, they may still be liable for the Top-up Tax if their global effective rate falls below 15%.
According to GloBE, this levy aims to ensure that large MNEs pay a minimum level of tax on the income they generate in every jurisdiction where they operate.
Additionally, this measure is designed to prevent MNEs from shifting their profits to low-tax havens and eroding the tax base of countries where they conduct substantial business.
The Act specifically targets “Domestic Constituent Entities” – branches or subsidiaries of MNEs located within South Africa.
These entities become jointly liable for paying the Top-up Tax if the MNE’s effective tax rate globally falls below the internationally agreed minimum.
Similar provisions apply to “Domestic Joint Ventures” – joint ventures situated in South Africa.
The calculation of the Top-up Tax considers various factors, including:
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Taxes already paid by the MNE in other jurisdictions;
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Income generated by South African entities that would typically be allocated to entities in other jurisdictions;
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Special provisions for “Investment Entities” – entities primarily engaged in investment activities.
Recognising the complexity of the new rules, the Act incorporates a “Transition Year” to facilitate a smooth implementation process.
This transition period allows MNEs to adapt their tax structures and comply with the GloBE Rules without facing immediate and potentially disruptive tax liabilities.
While the Act outlines the Top-up Tax calculation and liability, the specifics of reporting and payment are detailed in the accompanying Global Minimum Tax Administration Act.
MNEs operating in South Africa need to carefully assess their global effective tax rate, understand the calculation methodology of the Top-up Tax, and prepare for potential adjustments to their tax structures to comply with this new legislation.
To keep pace with evolving global tax standards, the Act also grants the Minister of Finance the power to amend the rules and regulations.
Overall, the South African government has stressed that the Global Minimum Tax Act is not merely about collecting more taxes, but rather ensuring a ‘fairer and more equitable international tax system.’
SOURCE:Ramaphosa signs off massive new law for South Africa – BusinessTech
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