Act No. 46 of 2024, Article 1 of 2.
The new Global Minimum Tax Act was published in Gazette 51830 on 24 December 2024.
The Act is to provide for the introduction of the Global Anti-Base Erosion (GloBE) Rules in South Africa, to provide for the imposition of Top-up Tax; and to provide for connected matters.
The Organisation for Economic Cooperation and Development (OECD)/G20 Inclusive Framework to counter Base Erosion and Profit Shifting (BEPS) has developed the GloBE Rules, with the Republic being an active member of the
OECD/G20 Inclusive Framework on BEPS and introduced a global minimum tax, designed to ensure large multinational enterprises pay a minimum level of tax on the income arising in each jurisdiction where they operate, as part of the solution for addressing the tax challenges of the digital economy, and South Africa adopted the GloBE Rules.
The purpose of implementing the GloBE Model Rules in South Africa is to enable South Africa to impose a multinational top-up tax at a rate of 15 percent on the excess profits of in-scope MNE Groups. It is proposed that the multinational top-up tax be imposed under:
- an Income Inclusion Rule (IIR) which taxes the domestic entity of an MNE Group on its allocable share of Top-up Tax arising in respect of the low-taxed income of any foreign group company in which it has a direct or indirect ownership interest; and
- a Domestic Minimum Top-Up Tax (DMTT), which imposes a joint and several tax liability on the domestic entities of an MNE Group for any Top-up Tax arising in respect of low-taxed income of those domestic entities (calculated on an aggregate basis but only with respect to entities located in South Africa).
In October 2021, South Africa joined with over 135 other jurisdictions to agree on a two-pillar solution to reform the international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate and generate profits. The GloBE Model Rules are one component of this two-pillar solution.
The following Administrative Guidance has been released by the Inclusive Framework since March 2022:
- OECD (2022), Safe Harbours and Penalty Relief: Global Anti-Base Erosion Rules (Pillar Two), OECD/G20 Inclusive Framework on BEPS, OECD, Paris. www.oecd.org/tax/beps/safe-harbours-andpenalty-relief-global-anti-base-erosion-rulespillar-two.pdf
- OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy: Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), OECD/G20 Inclusive Framework on BEPS.
www.oecd.org/tax/beps/administrative-guidance-global-anti-base-erosion-rules-pillartwo.pdf
- OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy: Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), July 2023, OECD/G20 Inclusive Framework on BEPS.
www.oecd.org/tax/beps/administrative-guidance-global-anti-base-erosionrules-pillartwo-july-2023.pdf
- OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy—Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), December 2023, OECD/G20 Inclusive Framework on BEPS.
http://www.oecd.org/tax/beps/administrative-guidance-global-antibase-erosion-rulespillar-two-december-2023.pdf
Further Administrative Guidance may be periodically issued by the IF to provide additional guidance on the interpretation and intended operation of the GloBE Model Rules (including safe harbours). Future Administrative Guidance may also have the effect of modifying the GloBE Model Rules.
To ensure that South Africa adheres to its commitment to implement and administer the GloBE Model Rules consistently with the outcomes provided for under the GloBE Model Rules and the Commentary (as updated from time to time through Administrative Guidance), it has been decided to incorporate the GloBE Model Rules into the Republic’s legislation by reference to the GloBE Model Rules, Commentary, and Agreed Administrative Guidance.
Application of the GloBE Model Rules
I. Clarifying the application of amendments to the Commentary and Administrative Guidance.
GloBE Model Rules and Commentary. Under this approach, it was proposed that when applying the GloBE Model Rules and Commentary, the most recent version of the Commentary will apply (updated by any Administrative Guidance that has been published before the start of the fiscal year) in respect of calculations that are being performed. This will ensure consistent application of the GloBE rules in line with the policy intention.
II. Interpretation of the GloBE Model Rules
The wording provides that the GloBE Model Rules are treated as applying “consistently with” the most recent Commentary and Administrative Guidance. The policy intention is that the Model Rules must be interpreted in accordance with the Commentary and Administrative Guidance. Where there are inconsistencies, the Commentary and Administrative Guidance should modify or override the GloBE Model Rules.
III. Entities that are in-scope for the GloBE Model Rules
The GloBE Model Rules apply to MNE Groups that have a consolidated annual revenue of at least 750 million Euros in at least two of the four fiscal years immediately preceding the tested fiscal year. The fiscal year is the period covered by the MNE Group’s consolidated financial statements.
IV. MNE group
An ‘MNE Group’ is a group with at least one entity or permanent establishment that is not located in the jurisdiction of the UPE. A member of an MNE Group (including a permanent establishment) is referred to as a ‘Constituent Entity’. The MNE Group’s Consolidated Financial Statements are used to determine what entities are within the group.
The Ultimate Parent Entity (UPE) of an MNE group is the entity that owns directly or indirectly a controlling interest in any other group entity but is not controlled directly or indirectly by another group entity.
V. Excluded entities
The following entities are excluded from the GloBE Model Rules:
- Governmental entities;
- International organisations;
- Non-profit organisations;
- Pension funds;
- Investment funds that are UPEs; and
- Real estate investment vehicles that are UPEs.
An entity owned by an Excluded Entity can also qualify as an Excluded Entity if it meets certain criteria relating to its ownership, assets, and income.
Entities that meet the definition of Excluded Entities are not subject to the operative provisions of the GloBE Model Rules. However, Excluded Entities are still members of an MNE Group, and therefore their revenue is taken into account for purposes of assessing whether the MNE Group meets the revenue threshold of EUR 750 million Euros.
VI. Application of the GloBE Model Rules
In general, the GloBE Model Rules apply a minimum tax on the excess profits of an in-scope MNE Group in each jurisdiction where those profits are taxed below the minimum 15 percent rate.
To determine whether Top-up Tax is due by an MNE Group, the Effective Tax Rate (‘ETR’) must be computed on a jurisdictional basis. Where this calculation results in an ETR that is below 15 percent, the MNE Group is required to pay a Top-up Tax, to bring the total amount of tax in that low-tax jurisdiction up to the 15 percent rate. The Top-up Tax is only computed in relation to the excess profits, which is the profit after applying a’substance-based income exclusion.’.
For purposes of this Act, the GloBE Model Rules apply for a Fiscal Year on the basis of the:
(a) Commentary to the GloBE Model Rules before the start of the Fiscal Year;
(b) Administrative Guidance to the GloBE Model Rules before the start of the Fiscal Year; and
(c) Safe Harbours before the start of the Fiscal Year.
“Commentary to the GloBE Model Rules’’ or ‘‘GloBE Commentary” means the commentary released in the document titled OECD (2022), Tax Challenges Arising from the Digitalisation of the Economy Commentary to the Global Anti-Base Erosion Model Rules (Pillar Two), OECD, Paris, and any update to that commentary released by the Inclusive Framework, as specified under Section 23.
“Administrative Guidance to the GloBE Model Rules” means administrative guidance on the GloBE Model Rules released by the Inclusive Framework being:
(a) OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), February 2023, OECD/G20 Inclusive Framework on BEPS, OECD, Paris;
(b) OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), July 2023, OECD/G20 Inclusive Framework on BEPS, OECD, Paris;
(c) OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), December 2023, OECD/G20 Inclusive Framework on BEPS, OECD, Paris; and
(d) any similar document subsequently released by the Inclusive Framework, as specified under Section 23.
“Safe Harbour” means an exception provided in Article 8.2.1 of the GloBE Model Rules whose design and eligibility conditions have been approved by the Inclusive Framework and set out in:
(a) OECD (2022), Safe Harbours and Penalty Relief: Global Anti-Base Erosion Rules (Pillar Two), OECD/G20 Inclusive Framework on BEPS, OECD, Paris;
(b) Administrative Guidance to the GloBE Model Rules; and (c) any similar document subsequently released by the Inclusive Framework as specified under Section 23.
For further detail of BEPS (Base Erosion and Profit Shifting), please read previous articles published on the Fincor website via links:
https://fincor.co.za/the-international-corporate-tax-problem-base-erosion-and-profit-shifting-beps/ https://fincor.co.za/publication-of-multilateral-convention-to-implement-the-tax-treaty-related-measures-to-prevent-base-erosion-and-profit-shifting-beps-mli/
https://fincor.co.za/addressing-the-tax-challenge-arising-from-the-digitalisation-of-the-economy-oecd-and-international-tax-legislation/
A second article will discuss “The Effective Tax Rate”, “Calculating the Top-up Tax”, “Income Inclusion Rule”, and “Domestic Minimum Top-up Tax”.