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income tax

Pillar Two Explained

The Organisation for Economic Co-operation and Development (OECD), together with the G20 countries, formed the OECD/G20 Inclusive Framework. The Framework comprises two pillars, both aimed at ensuring multinational enterprises (MNEs) pay a fair share of tax regardless of where they operate or generate profits. Under Pillar One, the focus was on the digital economy, whereas Pillar Two addresses matters of base erosion and profit shifting (BEPS). The latter Pillar includes the introduction of the global minimum tax (GMT).

The OECD published the model rules for the foundation of the GMT in December 2021. Under these rules, MNEs with annual consolidated revenue exceeding €750m would be subject to a minimum tax rate of 15% in every jurisdiction where the MNE operates. Top-up taxes would apply where the actual taxes paid in any jurisdiction fell below the 15% threshold. Notably, the collection of the top-up taxes would not necessarily occur in the impacted jurisdiction.

Draft legislation has been tabled in New Zealand, Canada and Germany, while GMT legislation has already been adopted in Denmark, Hungary, the United Kingdom and Japan.

Pillar Two Adoption in South Africa

South Africa, as well as all remaining African countries have not yet adopted Pillar Two legislation. Government had intended to publish a draft position for Pillar Two implementation for public comment as an outcome of the 2023 legislative cycle. This did not materialise, however, but in October 2023, the African Tax Administration Forum (ATAF) published its amended Suggested Approaches to Drafting Domestic Minimum Top-Up Tax Legislation. In this publication, ATAF highlighted the implications of historic tax incentives granted to MNEs in African countries that had lowered their effective local tax rates below the GMT of 15% (as an incentive to operate in the local economy). It pointed out that the top-up requirement could be satisfied in a different tax jurisdiction, resulting in a loss of tax revenues to the affected African countries. Citing this risk, ATAF advised African countries to enact local minimum top-up legislation “to protect themselves from giving away taxing rights to developed countries on top-up tax arising from their own tax incentives”.

The 2024 annual budget speech by Finance Minister Enoch Godongwana has confirmed that South Africa will be legislating for the adoption of Pillar Two legislation, with an income inclusion rule along with a domestic minimum top-up tax, both designed to target eligible multinational corporations.

Creating Legislation for Pillar Two in South Africa

Despite South Africa hosting a relatively small number of multinational entities (MNEs) that surpass the revenue threshold set by Pillar Two, there is a significant presence of foreign companies operating within its borders. South African-based subsidiaries or permanent establishments of MNEs based in those jurisdictions that have already adopted Pillar Two GMT legislation will be required to perform minimum tax calculations and meet reporting requirements that support their parent entity’s reporting.

We are advising South African taxpayers likely to be impacted by such GMT legislation due either to the local introduction of minimum taxes or because they are a local subsidiary of an MNE with a presence in a Pillar Two jurisdiction to start preparing for the onerous reporting requirements likely to be placed on their taxation and finance teams. There are also likely to be extensive compliance obligations on local entities that fall into the GMT net. The financial implications of erroneous interpretations or calculations should not be ignored.

MMS Group is closely following local developments in the unfolding complexities of Pillar Two GMT. Should you require assistance in preparing your team in anticipation of these changes, our professional income tax team can assist. Contact us today.