Members of the Inclusive Framework on Base Erosion and Profit Shifting (the “Inclusive Framework”) developed the Global Anti-Base Erosion Model Rules (the “Model Rules”), which was released in December 2021. The Model Rules are drafted in template form to allow jurisdictions to translate the Model Rules into domestic law.

As part of the 2024 budget, the Minister of Finance published the Draft Global Minimum Tax Bill (the “DGMT”) and Draft Global Minimum Tax Administration Bill (the “DFMTA”) (collectively the “Bills”) for public comment. These Bills enable South Africa to impose a multinational top-up tax at a rate of 15% on multinational enterprise (“MNE”) groups with a consolidated annual revenue of at least 750 million Euros in at least two of the four years preceding the relevant annual financial year. The Bills are stated to be effective from 1 January 2024 and apply to Fiscal Years (as defined in the Bills) beginning on or after that date.

The publication of the Bills is aimed at implementing the Model Rules in South Africa in line with its role as a member of the Inclusive Framework. The rationale behind the proposed global minimum tax rate is that MNE groups will pay a minimum level of tax in every jurisdiction in which they operate.

We set out below a summary of the main provision of the Bills.

International Rules and Commentary deemed to be binding domestic law

The proposed global minimum tax rate as levied in terms of the DGMT is based on the Model Rules and the Administrative Guidance on the Model Rules (“Commentary”). An ambulatory approach is suggested which entails that our domestic law will automatically update when the Model Rules or Commentary is updated.

A multinational enterprise group

The DGMT applies to a MNE group that includes a Constituent Entity, as defined in the Model Rules, that is located in South Africa. A MNE group is a group with a permanent establishment, or one entity located outside the jurisdiction of the ultimate parent company.

Tax under the Income Inclusion Rule and Domestic Minimum Top-Up Tax

The multinational top-up tax is proposed to be implemented to achieve a global minimum tax rate of 15% which will be imposed under two distinguishable rules. Firstly, the Income Inclusion Rule (“IIR”) determines that a domestic ultimate parent company that owns an ownership interest in a Low-Taxed Constituent Entity, as defined in the Model Rules, will be taxed in terms of a allocatable share of the top-up tax of that Low-Taxed Constituent Entity. Secondly, a Domestic Minimum Top-Up Tax (“DMTT”) will be payable by domestic Constituent Entities located in South Africa to ensure the global minimum tax rate of 15% on their domestic excess profits is achieved under certain circumstances.

How to determine the effective tax rate in South Africa

The global minimum tax rate of 15% is compared to the effective tax rate in South Africa to determine whether a top-up tax is payable. The effective tax rate of a jurisdiction is calculated based upon a set formula which at a high-level amounts to dividing the total adjusted tax for all local Constituent Entities by the total adjusted profit of those entities. The effective tax rate will not be calculated where the Average Global Anti-Base Erosion (“GloBE”) Revenue in South Africa is less than 10 million Euros and the Average GloBE Income or Loss for South Africa is less than 1 million Euros.

If the effective tax rate is below 15% a top-up tax will be payable. Each local Constituent Entity is jointly and severable liable for the top-up tax. An ultimate parent company situated in South Africa may further be liable for the multinational top-up tax (IIR).

The top-up tax rate is applied to excess profits of entities in that jurisdiction, the ‘excess profit' is to be calculated in accordance with the Model Rules. 

Administrative penalties

A fixed amount administrative non-compliance penalty of R50,000 is proposed for failure to comply with the obligation to submit a return in accordance with the Model Rules and further requirements under the Tax Administration Act 28 of 2011.

It is proposed that the returns must generally be filed 15 months after the Fiscal Year end, or 18-months after the Fiscal Year commencing on or after 01 January 2024 but before 01 January 2025. It is further proposed that the top-up tax must be paid on or before the due date for filing the return.

The Bills are open for public comment until 31 March 2024 after which National Treasury and the South African Revenue Service (“SARS”) will engage stakeholders to discuss the comments.

As the Bills will be deemed to have come into operation on 1 January 2024, MNE's and their Constituent Entities which may fall within their provisions would need to consider its provisions carefully to determine what effect the Bills will have on their tax liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.