These companies will be hit with a new tax in South Africa

South Africa has joined global efforts to crack down on multinational corporations and force them to pay a minimum tax rate of 15%. 

This will significantly impact a handful of South African companies, but has much larger consequences for subsidiaries of global multinationals that operate in the country. 

The major shift in global taxation has been driven by the introduction of the Pillar Two framework of the Organisation for Economic Co-operation and Development (OECD). 

This framework aims to ensure that multinational enterprises (MNEs) pay a minimum level of tax on their global profits, PwC’s tax experts explained in a recent research note. 

South Africa has fully embraced these changes by adopting the Pillar Two framework through the enactment of the Global Minimum Tax Act in December 2024. 

This global tax framework would enable South Africa to impose a multinational top-up tax on the excess profits of multinationals that fall within the Act’s scope. 

PwC explained that very few South African companies will have to deal with these changes as they simply fall below the current threshold of annual turnover amounting to at least €750 million (R15 billion). 

However, the rules will apply to local subsidiaries of internationally-headquartered MNEs that are within this scope. 

This will make SARS effectively part of a global tax network, sharing information with international tax authorities to ensure that local subsidiaries are not undertaxed. 

For purposes of Pillar Two, an MNE group is defined as a group with at least one entity or permanent establishment that is not located in the jurisdiction of the ultimate parent entity. 

The MNE group’s consolidated annual financial statements will be used to determine which entities are within the group.

Ultimately, the aim of the Global Minimum Tax Act is to ensure global companies pay a minimum level of tax on the income they generate in South Africa. 

It also hoped the Act would prevent these companies from shifting their profits and offices to low-tax jurisdictions, eroding the tax base of countries where they make significant revenue.

According to some calculations, only around 44 companies in South Africa fit the bill as a global company with significant operations within the country. 

If the tax is implemented effectively, the National Treasury estimates that it could raise an additional R8 billion in tax revenue by the 2026/27 financial year.

How it will work

This tax is applied at a balancing rate to ensure an effective tax rate of 15%, which will be imposed on MNEs in South Africa at two levels –

• Domestic minimum top-up tax (DMTT): Imposes a joint and several tax liability on the domestic entities of MNEs for any top-up tax arising from low-taxed income of those subsidiaries, calculated on an aggregate basis but only with respect to entities located in South Africa.
• Income inclusion rule (IIR): Taxes the domestic entities of MNEs on their allocable share of top-up tax arising from the low-taxed income of any foreign group company in which they have a direct or indirect ownership interest.

The DMTT will apply in situations where the effective tax rate payable by an MNE in respect of its South African profits is lower than 15%.

This makes all South African constituent entities of such an MNE jointly and severally liable for topping up such tax to an effective rate of 15%. 

If South Africa did not impose a DMTT, any top-up tax in respect of the profits made in the country would be lost to the fiscus.

This is because it would be imposed under the IIR in the jurisdiction in which the MNE is headquartered and paid by the MNE to its headquarters jurisdiction. 

The IIR will, in essence, apply to MNEs headquartered in South Africa that fall within its scope. 

It will require the tax to be topped up to an effective rate of 15% in respect of jurisdictions in which the MNE operates and where the effective rate of tax payable in that jurisdiction is lower than 15%. 

This tax will be payable to the South African Revenue Service (SARS) and not the jurisdiction in which the tax rate was lower than 15%.

The rules and required calculations can be very complex, and reporting may result in significant additional costs for MNEs within scope, PwC warned. 

Although South Africa’s corporate income tax rate is 27%, various tax incentives and regimes may lower the effective tax rate to below 15%. 

Even if the effective tax paid in South Africa is more than 15%, a GloBE information return must be submitted to SARS annually for domestic constituent entities of MNE groups within scope. 

However, an 18-month period is granted for the filing of the first required returns and payment. As a result, South Africa would only start collecting any tax payable in terms of the rules from 30 June 2026 onwards.