Where govt can find more tax
PILLAR TWO: GODONGWANA EXPECTED TO ANNOUNCE PROGRESS
This solution is expected to collect an additional R5.68trn globally.
An area that may receive special attention during Finance Minister Enoch Godongwana’s annual budget this week is the implementation of the global anti-base erosion (GloBE) rules.
South Africa committed to an implementation date of 1 January, 2025 but still lacks a discussion document, let alone draft legislation.
Under the Organisation for Economic Cooperation and Development (OECD) Inclusive Framework, more than 140 countries agreed to enact a two-pillar solution to address the challenges arising from the digitalisation of the economy. Pillar Two introduces a global minimum effective tax rate (ETR) of 15%.
Aligning with global tax rules
Marcus Stelloh, head of transfer pricing at BDO, said the implementation of Pillar Two is important and significant as it shows SA’s alignment with the global tax framework.
Countries like the UK, a key trading partner, and Australia have already implemented Pillar Two. It would therefore only make sense for SA to follow suit.
Additionally, with the International Financial Reporting Standards having already published a paper outlining how to disclose Pillar Two in the financial statements of multinational companies, it is “just a matter of time”.
Worldwide, the OECD expects to collect an additional $300 billion (about R5.68 trillion) because of the Pillar Two rules. It is currently estimated that more than a third of global profit (36.1%) is taxed at ETRs below 15% and that more than half of this profit (53.2%) is in high tax jurisdictions (tax rates higher than 15%).
Previous estimates only considered the impact of Pillar Two in low tax jurisdictions; however, it now estimates that $2.4 trillion of global net profits are taxed below 15%.
Stelloh believes there will be an announcement about Pillar Two in Godongwana’s budget speech. Pillar Two could assist with additional collections, which, welcomely, would not come from within South Africa, he said.
Christian Wiesener, member of the South African Institute of Chartered Accountants tax committee, says in a statement that Pillar One is still under discussion.
In last year’s budget, the minister promised the publication of a discussion document enabling interested parties to comment on the proposed legislation necessary to implement Pillar Two.
New territory
Wiesener, who is also associate director at KPMG, explains that the Pillar Two rules broadly apply to multinational entities (MNEs) with consolidated group revenue of more than €750 million in at least two of the past four years.
“The so-called GloBE rules are complex and provide a mechanism for calculating the effective tax rate of an entity, which may require adjustments based on GloBE rules.”
The top-up tax (to achieve a global minimum rate of 15%) can be levied in three different ways: the qualified domestic minimum topup tax, the income inclusion rule, and the undertaxed profits rule.
A further but “conceptionally different rule” is the “subject to tax” rule, which is a treaty-based rule. This will apply to intra-group interest, royalties and a defined set of other intragroup payments, explains Wiesener. The calculation of the GloBE effective tax rate is more complex than it appears, he added.
Stelloh said the implementation of Pillar Two is new territory for everyone, and all the “practical headaches” that may come as a result of SA’s unique economic position are still unknown.
He believes few multinationals are ready for the implementation of Pillar Two. Some have started analysing the global effective tax rates in their respective jurisdictions to identify potential additional tax liabilities.
Local legislation
SA needs local legislation that gives it the right to charge the additional tax. “It is really a complex system, and we do not even have a discussion document. SA committed itself to promulgate legislation with an effective date of 1 January, 2025,” said Westermeyer.
He said although SA does not have many MNEs that meet the threshold, many foreign inbound companies have operations in SA.
“Choosing the best methodology wisely and implementing the right Pillar Two legislation could certainly assist Sars’s collection efforts,” he said.
“It will be interesting to see what the minister will announce on Wednesday.”