This development follows the formalization of South Africa’s collaboration with the OECD on 16 July 2023, when both parties signed a Memorandum of Understanding for their inaugural Joint Work Programme. This five-year initiative is set to deepen OECD-South Africa cooperation, laying the groundwork for enhanced alignment on global tax policies.
Developed under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), the GMT Act reflects the principles of the Pillar 2 proposals by setting an effective minimum tax rate of 15% for MNE Groups with annual revenues of at least €750 million. South Africa’s adoption of this framework underscores its role as an active participant in shaping equitable international tax standards.
Who Doesn’t Need to Worry About the Global Minimum Tax Act?
Multinationals with a South African presence have been preparing for worldwide changes as well as the South African impact of the GMT Act, with discussions largely focused on compliance, international competitiveness, and economic impacts. However, for many businesses and individuals, this legislation may not be as relevant as it seems—at least for now.
While the GMT Act aims to curb profit shifting to low-tax jurisdictions and erosion of the tax base by ensuring a fair share of taxes are paid by, the Act specifically targets MNEs with annual revenues of at least €750 million. This means that unless your business operates on a global scale and meets the revenue threshold, the GMT Act likely does not directly affect you.
In addition to the group annual revenue threshold, here’s a list of those who don’t need to lose sleep over the GMT Act:
- Governmental Entities;
- International Organisations;
- Non-profit Organisations;
- Pension Funds;
- Investment Fund that is an Ultimate Parent Entity;
- Real Estate Investment Vehicle that is an Ultimate Parent Entity; or
- Entities owned or partially owned by the aforementioned entities in certain circumstances.
The Real Tax Issues You Should Focus On
While the GMT Act is grabbing headlines, many other tax issues remain more critical and immediate for most South African businesses with cross-border activities earning revenue. These include:
- Permanent Establishment (PE) Risks Where your company has a business presence, employees, offices etc. in another country through which its business is wholly or partly carried on, it can be considered as having a permanent establishment in that foreign country, exposing your business to income tax liabilities in that country and risk of double taxation in South Africa.
- Transfer Pricing Compliance If your business involves a group of companies where companies within the group are operating in different jurisdictions, transfer pricing regulations should be at the top of your compliance checklist. Many taxpayers fall foul of the transfer pricing provisions, allowing SARS to make an adjustment to taxable income and thereby increasing their income tax liability.
However, with proper planning and specialized guidance, compliance with these provisions can be effectively achieved. In the recent case of ABD Limited v Commissioner, SARS (IT14302), dealing with transfer pricing, the court found in favour of the taxpayer who licensed its intellectual property to foreign subsidiaries at a small 1% mark up, based on the computation method used.
- Controlled Foreign Company (CFC) Rules In the event that South African resident shareholders collectively hold more than 50% of the total shares in a foreign company, the resident shareholders should ensure they are aware of the CFC imposition rules, which can result in foreign company income being imputed to resident shareholders.
It is possible to navigate the negative effects of CFC imposition rules by qualifying for the exemption afforded to foreign business establishments, the high tax exemption or headquarter company exclusion. In the Constitutional Court case of Coronation Investment Management SA (Pty) Limited v Commissioner for the South African Revenue Service 2024 (6) SA 310 (CC), the court had to consider whether the net income CFC should be included in the taxable income of its parent company, which is resident in South Africa. The court found in favour of Coronation on the basis that all the requirements of a foreign business establishment was met under Section 9D of the Income Tax Act, 58 of 1962.
- Cross-Border Withholding Taxes Ensuring compliance with withholding tax obligations under the taxation laws of foreign countries are crucial, especially when making payments to foreign entities or receiving cross-border income, whether in the form of dividends, interest or management fees. However, taxpayers should take note that cross-border withholding taxes can often be reduced under the relevant Double Taxation Agreement, providing valuable relief and opportunities to optimize tax efficiency.
- Value-Added Tax (VAT): When engaging in cross-border transactions, it is essential to understand the VAT implications that arise, as different countries have varying rules regarding VAT on international sales. Proper documentation and compliance with the VAT registration requirements in both the exporting and importing countries are crucial to avoid penalties and ensure smooth transactions. Failure to account for specific rules, such as South Africa’s imported services VAT provision, can result in costly repercussions, with SARS potentially deducting the VAT portion from the payment made for services—ultimately reducing the income received by the South African entity.
- Exchange Control: Whilst not a tax rule, exchange control goes hand in hand with tax where money is flowing across borders. For South African businesses, navigating these regulations is key, as the Reserve Bank continues to enforce them despite a gradual relaxation of certain rules in recent years. These controls govern the flow of funds across borders, with specific approvals often required for significant payments or transactions involving restricted jurisdictions. Ignoring these requirements isn’t just risky—it could lead to penalties or even the reversal of transactions. Staying informed and proactive ensures businesses can move funds efficiently while avoiding unnecessary complications.
Conclusion: Focus on What Matters Now
The GMT Act may be an important step in international tax reform and whilst National Treasury and SARS will be incorporating the changes happening at OECD level into South African law, for many businesses, it remains a distant issue. Instead of being caught up in the hype, businesses should concentrate on more pressing tax challenges, such as permanent establishment risks, transfer pricing, and cross-border compliance and VAT requirements.
By focusing on these critical areas and staying informed, you’ll ensure your business is well-positioned to handle today’s tax environment—and whatever changes the future may bring.
