Global Corporate Tax Changes: Advice Is More Crucial Than Ever

“Over the next few years, we are also implementing a global minimum corporate tax to limit the negative effects of tax competition.” (Enoch Godongwana, Minister of Finance, Budget 2024)

There have been significant shifts in the corporate income tax landscape in South Africa and globally. Recent trends noted by the OECD and The Tax Foundation include:

• Statutory corporate income tax rate changes in 13 countries in 2023
• A reversal of a two-decade downward trend in corporate tax rates
• An increase in the average global CIT rate from 20% to over 21% in the last year.

Corporate tax rates have declined from the highs of an average 40% in 1980 and 28% in the early 2000s to around 21%. South Africa has also reduced its CIT rate over the years, from 30% in 2000 to 27% in 2022 – but it is still substantially above the international average.

A new global tax treaty

Dubbed “an historic step towards changing the financial landscape”, 110 UN Member States, including South Africa, recently voted in favour of the terms of reference for a new global tax treaty. The UN says that all 193 UN Member States could vote on a finalised UN global tax treaty as early as 2027.

In the meantime, more than 140 countries have already agreed to this global minimum tax, and some have already implemented this tax reform, including South Africa. Finance Minister Enoch Godongwana announced in his 2024 Budget Speech that South Africa will be implementing the global minimum tax with effect from years of assessment commencing on or after 1 January 2024.

Why a minimum global tax?

Multinational companies use tax planning strategies, like moving profits to low-tax jurisdictions, to minimise their tax liabilities. A global minimum tax aims to ensure that these multinationals pay their fair share of taxes, regardless of where they operate.

This limits the race to the bottom of effective corporate tax rates for large multinationals, with countries competing to attract income by offering low tax rates and tax incentives.

On a social responsibility level, it goes without saying that companies should contribute fairly to the financial stability of the countries they operate in.

Who is affected?

A global minimum tax will ensure that any multinational enterprise group with annual revenue exceeding €750 million (+-R15 billion) will be subject to an effective tax rate of at least 15%, regardless of where its headquarters, operations, sales or profits are located.

Implementation in South Africa

Government plans to introduce two measures to effect this change for qualifying multinationals:

1. The income inclusion rule applies to multinational entities headquartered in South Africa and requires a tax top-up if the effective rate in the jurisdictions the multinational entity operates in is lower than 15%. This tax is payable to SARS as opposed to the relevant jurisdiction.
2. The domestic minimum top-up tax applies in situations where the multinational entity’s effective tax rate in respect of its South African profits is lower than 15%. In such circumstances, the South African constituent entities of the multinational entity are jointly and severally liable for the top-up tax.

What is the expected impact?

A global minimum tax will ensure that multinational corporations contribute their fair share of taxes in jurisdictions where they operate, curbing tax avoidance and safeguarding countries’ tax bases. It’s expected to generate significant additional tax revenues for many countries, especially those in the Global South.

In South Africa, National Treasury predicts that implementing the global minimum tax will bolster our corporate income tax base by approximately R8 billion in 2026/2027.

Whether a global minimum corporate tax can deter corporate tax avoidance and evasion remains to be seen. Concerns have also been raised about the impact on companies’ competitiveness, likely increased compliance costs, and possible double taxation.

Will it affect SMEs?

In the long run, the changes should benefit smaller local companies. With a broadened tax base, there may be opportunities in South Africa to lower the personal income tax burden on individuals, or to consider more globally competitive corporate tax rates than the current 27%, which is well above the international average.

The change may also create a more certain and predictable global tax environment, which is conducive to long-term planning and investment decisions.

What needs to be done?

Qualifying multinationals should assess their effective tax rates for the income inclusion rule and domestic minimum top‐up tax from 1 January 2024. Their local and global tax planning, and financial structuring, may need to be reviewed and updated.

While this probably doesn’t apply to your business (yet), companies of all sizes should note the significant shifts in international and local tax policy. This makes our up-to-date, expert tax assistance a must-have for every company navigating the changing tax landscape.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

© CA(SA)DotNews