South Africa: The Anti-Global Base Erosion Rules Released: What it Means for MNE Taxation

On 20 December 2021, the Anti-Global Base Erosion (“GloBE”) Rules were released by the OECD.

Also known as Pillar Two, the rules are designed to ensure that large multinational enterprises (“MNEs”) pay a minimum level of tax on income arising in each jurisdiction in which they operate.

Currently drafted as model rules that can be easily translated into domestic law, they are intended to assist jurisdictions that accept them in implementing Pillar Two together with other jurisdictions within the agreed timeframe.

Although not mandatory, the GloBE rules have been agreed as a “common approach” by over 130 countries. If they do not implement the rules, the agreement on a common approach means that one jurisdiction accepts the application of the rules by another in respect of MNEs operating in its jurisdiction.

Commentary on the GlobE will be released later this year and will provide further guidance on the interpretation of the rules. Further stakeholder consultation will follow and the aim is to finalise the implementation framework by the end of 2022. A model treaty provision will be developed to facilitate the implementation of the Subject to Tax Rule (“STTR”) for inclusion in relevant bilateral treaties.

MNEs potentially liable to tax

MNEs with a foreign tax presence that have consolidated revenues of EUR750-million in at least two out of the last four years fall within the scope of the rules. Government entities, international organisations and non-profit organisations and certain pension, investment or real estate funds will be excluded.

Rate of tax

The rate of tax owed is the difference between the 15% minimum rate and the effective tax rate in the jurisdiction. The top-up tax percentage is then applied to the GloBE income in the jurisdiction. A deduction for substance based income is allowed and is calculated as a percentage mark-up on tangible assets and payroll costs.

Steps in calculating the tax

The following steps will be followed:

1. Identify groups within scope and the location of each constituent entity within the group
2. Determine the income of each constituent entity (GloBE Income).
3. Determine taxes attributable to the income of a constituent entity (covered taxes).
4. Calculate the effective tax rate of all constituent entities located in the same jurisdiction and determine the resulting top-up tax.
5. Impose top-up tax under the Income Inclusion Rule or Undertaxed Payments Rule in accordance with the agreed rule order.

Ensuring that MNEs pay a minimum level of tax

When countries decide to introduce the GloBE rules, implementation occurs in a consistent and coordinated manner which will ensure that, if a critical mass of countries is achieved, MNEs will be required to pay the minimum level of tax on the profits arising in every country where they operate. There is an agreed order in which the rules are applied and the rules include backstop or secondary rules that will apply if the country where an MNE is located does not apply the primary rule.

Countries that adopt the GloBE rules will use a common tax base and definition of covered taxes and apply an effective tax rate test to calculate whether an MNE has an effective tax rate below the agreed minimum rate of 15% in any jurisdiction where it is located.

Double taxation

Double taxation should not arise as a result of the minimum tax rules. Because the rules operate as a minimum tax, they complement existing corporate tax provisions such as the controlled foreign company (“CFC”) approach. So, taxes paid on income arising in the jurisdiction including under CFC rules is taken into consideration for purposes of calculating the effective tax rate in the jurisdiction. When tax is paid above the minimum rate as a result of the existing rules, no additional tax will be payable under the new rules.

Impact on existing tax treaties

It is intended to develop a model treaty provision to give effect to the STTR and a multilateral instrument to facilitate the consistent implementation of the STTR in the relevant bilateral treaties. Developing countries should be empowered to protect their income tax base through the application of the STTR which will allow them to retain their taxing right on certain payments made to related parties offshore such as interest and royalties which might otherwise have been foregone under existing treaties.

Sundry matters

Provision is made for various matters such as transitional rules, corporate restructurings and joint ventures and administrative and filing obligations. De minimis rules and safe harbours are also included.

Mark Badenhorst

Tax | Executive Consultant
mbadenhorst@ENSafrica.com
+27 82 560 453