In order to implement the GloBE Pillar Two rules in South Africa, a draft Global Minimum Tax Bill 2024 ("Global Minimum Tax Bill") was published on the 21st of February 2024 and subsequently enacted into law on the 24th of December 2024 through the Global Minimum Tax Act 46 of 2024 ("the GMT Act"). The GMT Act introduces the imposition of Top-up Taxes on qualifying multinational enterprises (MNEs) operating within South Africa.
The GMT Act is deemed to have come into operation on the 1st of January 2024, and qualifying MNE's are required to apply the provisions of the GMT Act in the fiscal year beginning on or after that date (1 January 2024), meaning it has retrospective application. This approach ensures that South Africa does not lose out on any top-up tax that could otherwise be collected by another jurisdiction, particularly concerning MNEs operating within the country.
Qualifying Multinational Enterprises
The provisions of the GMT Act apply to entities within a "multinational enterprise group," which is defined in the GMT Act as any group that includes at least one entity or permanent establishment located outside the jurisdiction of the Ultimate Parent Entity, as outlined in Article 1.2 of the GloBE Model Rules, and falls within the scope of Article 1.1 of those rules. In essence, the GMT Act applies to entities within an MNE group that has a total consolidated group revenue that exceeds EUR 750 million in at least two of the four fiscal years immediately preceding the tested fiscal year.
Application of the GMT Act Provisions
Instead of redrafting the Organisation for Economic Co-operation and Development (OECD) Model Rules, the South African GMT Act directly incorporates the OECD GloBE Model Rules, along with related commentary, administrative guidance and safe harbors, into the South African law through Part II of the GMT Act. As a result, the GMT Act references the OECD GloBE Model, specifying which provisions of the OECD GloBE Model will not apply in the context of South Africa.
The GMT Act provides for two key measures to impose the top-up tax for qualifying multinationals paying an effective tax rate of less than 15 per cent in South Africa.
These measures are, the Domestic Minimum Top-up Tax (DMTT) and the Income Inclusion Rule (IIR). The DMTT take precedence over IIR and therefore DMTT should be considered prior to the IIR, and this measure ensures that the domestic minimum tax liability is fulfilled before resorting to international mechanisms, like the IIR, to prevent base erosion and profit shifting.
Domestic Minimum Top-up Tax
The DMTT, similar to the Qualified Domestic Minimum Top-up Tax (QDMTT), enables South Africa to impose topup tax on the profits of low-taxed South African-based entities within MNE groups that do not have an Ultimate Parent Entity (UPE) in South Africa.
The DMTT places joint and several tax liability on the South African entities for any top-up tax related to their low-taxed income.
The following articles of the OECD GloBE Model Rules are specifically excluded from the interpretation of DMTT section of the GMT Act:
- Article 2, which covers the charging provisions
- Article 5.2.4, which covers the allocation of Top-up Tax amongst Constituent Entities.
- Article 5.2.5, which covers allocation of Top-up Tax amongst Constituent Entities when there is no Net GloBE Income for that Fiscal Year.
- Article 5.4.2 to 5.4.3, which covers the additional top-up tax.
- Article 6.2.1(h), which covers the application of Income Inclusion Rule in respect of the acquisition of a target entity.
- Article 6.4.1(b) and (c), which covers the application of Income Inclusion Rule and Under-Taxed Profits Rule (UTPR) in connection with Joint Venture and Joint Venture Subsidiaries.
- Article 6.5.1(e) to (f), which covers the application of Income Inclusion Rule and UTPR in connection with Multi-Parented MNE Groups.
- Article 7.3, which covers the eligible distribution tax system.
- Article 9.3, which covers the exclusion from the UTPR of MNE Groups in the initial phase of their international activity.
Furthermore, the QDMTT safe harbours specified in the GloBE Commentary will not be applicable when applying the provisions of DMTT under the GMT Act.
Income Inclusion Rule
The IIR requires the domestic UPE entity of the MNE Group to pay top-up taxes equivalent to its direct or indirect ownership interest in the foreign entity with low-taxed income. For a South African-based UPE with foreign subsidiaries or permanent establishments, the IIR may apply to the top-up tax determined in accordance with Articles 2.1 to 2.3 of the GloBE Model Rules.
The following articles of the OECD GloBE Model Rules are specifically excluded from the interpretation of the IIR section of the GMT Act:
- Articles 2.4 to 2.6, which covers the UTPR charging provisions.
- Article 9.3, which covers the exclusion from the UTPR of MNE Groups in the initial phase of their international activity. It is important to note that the UTPR is not included in South Africa's GMT legislation.
Obligation to Submit the GloBE Information Return
Each South African entity belonging to MNE group, is required to submit the GloBE information return (GIR) in terms of the GloBE Minimum Tax Administration Act, 2024 (GMTA Act). In terms of the GMTA the GIR is a return that conforms to the requirements of Articles 8.1.4 to 8.1.6 of the GloBE Model Rules. The GIR will be submitted in South Africa only if the UPE/designated filing entity is not located in a country that has a bilateral or multilateral agreement with the South African Revenue Services (SARS), which facilitates the automatic exchange of GIRs (referred to as a "qualifying competent authority agreement") for the relevant fiscal year.
An entity can be appointed by the MNE Group to file returns on behalf of the MNE Group entities, the selected entity is commonly referred to as the" designated filing entity". This entity will be responsible for submitting returns on behalf of the MNE Group. The GMTA Act does provide for an alternative whereby by an entity that is part of an MNE group may be selected as a designated local filing entity. The selected local designated entity will be responsible for filing the GIRs on behalf of all the South Africa entities within the MNE Group.
The GloBE information return must be submitted within 15 months after the end of the MNE Group's fiscal year (or within 18 months if the South African entity(ies) has never been obligated to submit a GloBE information return in another jurisdiction prior to the 1st of January 2024). If the designated filing entity (located in a country that has a qualifying competent authority agreement with South Africa) of the MNE Group has filed the GloBE information return in its country, the South African entity(ies) must notify SARS 6 months before the due date of the return. The notification should specify the entity responsible for submitting the GloBE information return and the jurisdiction where it will be submitted.
Payment of the Top-up Tax, Penalties, Interest and Refunds.
The top-up tax can be paid by the designated local filing entity or the designated filing entity on behalf of all local entities. If the designated local filing entity or designated filing entity fails to make the payment, the South African entity(ies) will be liable for the top-up tax. Non-submission of the GloBE Information Return or the notification may result in SARS imposing an administrative penalty of up to R50,000. The penalty may be doubled or tripled in the following scenarios: " If the unpaid top-up tax exceeding R5 million, the penalty imposed may be up to R100,000, and " If the unpaid top-up tax exceeding R10 million, the penalty imposed may be up to R150,000. Other penalties outlined in the Tax administration Act 28 of 2011 (TAA) may be imposed by the SARS for failure to comply with the obligations set out in the GMTA Act. Interest may be imposed for failure to comply with the obligations outlined in the GMTA Act, the imposition of interest will be regulated by TAA. SARS is required to refund the South African entity(ies) any amount that is due to excess top-up-tax payments, in accordance with the TTA.
Records Retention Requirements
The TAA requirements should be considered when determining the records that should be retained by the domestic entity. In addition to the record retention obligations under the TAA, the domestic entity must also maintain records to demonstrate compliance with both the GMT Act and the GMTA Act. The period that the records, books of accounts, or documents must be retained for purposes of the GMTA Act is extended to seven years.
Impact of GloBE Rules on businesses
For South African headquartered MNE groups operating in jurisdictions like the Virgin Islands, Guernsey, Isle of Man, Jersey, or other regions with low tax rates, it is essential to evaluate how the implementation of the GloBE rules affects the overall tax risk for the group. These regions, historically known for their favorable tax rates, could face growing pressure to align with global tax standards, potentially leading to higher tax obligations. In South Africa, the GloBE rules could significantly impact businesses in sectors that benefit from substantial tax incentives, such as mining, research, filmmaking, manufacturing, and those operating in Special Economic Zones (SEZs). It is recommended that qualifying MNE groups in these industries conduct comprehensive assessments to understand how these changes will affect their global tax position. Failure to comply with the GloBE rules could lead to additional taxes, penalties, and reputational damage. By conducting this assessment, businesses can identify potential risks, adjust their strategies, and ensure ongoing compliance with the evolving global tax landscape.
Should you require personalized advice or further clarification regarding South Africa's Global Minimum Tax legislation and its potential impact on your business, please do not hesitate to contact us. Our team is available to provide tailored guidance and support to ensure your compliance with the evolving tax landscape.
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.
