Big tax changes hitting South Africa

South Africa is cracking down on multinational corporations, requiring these companies to pay a minimum tax of 15%.

This will align the country with a global initiative to curb tax avoidance and ensure fair revenue distribution across jurisdictions.

President Cyril Ramaphosa has signed the Global Minimum Tax Act into law, effectively requiring multinational companies headquartered in South Africa to pay a minimum of 15% tax on their earnings. 

This is part of a much bigger global initiative whereby nearly 140 countries have agreed to implement a tax of at least 15%. 

The idea behind this legislation is to help prevent countries from competing to provide multinationals with the lowest tax rate

On The Money Show with Stephen Grootes, ENS tax executive Charles de Wet explained that this aligns with a global trend to curb multinational companies’ tax avoidance.

Over the years, the focus has shifted towards preventing these corporations from exploiting tax havens to minimise their tax obligations.

The Organisation for Economic Co-operation and Development (OECD) previously introduced the Base Erosion and Profit Shifting (BEPS) programme.

BASE is an initiative focused on transparency and reporting to ensure that companies pay their fair share of taxes in the countries where they operate.

The global minimum tax represents a “version 2.0” of these efforts, specifically addressing what is known as “Pillar Two”, De Wet explained.  

South Africa’s adoption of the legislation, which applies to financial years beginning on or after 1 January 2024, was driven by the need to keep pace with European countries that had already implemented similar measures.

According to De Wet, South Africa introduced the tax to remain aligned with global developments and to ensure it retained its fair share of tax revenues rather than losing them to other jurisdictions.

Notably, the tax applies only to the world’s largest companies, those with a turnover exceeding €750 million (approximately R14.5 billion) calculated over a five-year period, which limits the scope of the legislation to a relatively small number of multinational corporations.

The tax was first announced during the February 2024 budget speech, with the Minister of Finance confirming it would take effect from 1 January 2024. 

However, the process required draft Bills to be published for public comment, presented to the Portfolio Committee on Finance, and ultimately signed into law by the President on 24 December 2024.

De Wet said there is some controversy surrounding the tax, particularly its retrospective application, which often raises concerns among tax professionals.

However, he noted that this case was somewhat different, as the announcement was made well in advance, and the legislation aimed to align with global trends. Transitional measures were also introduced to ease implementation.

For example, companies with a financial year ending in March 2024 would only be affected from their 2025 financial year onwards. 

According to de Wet, the tax is designed to address both outbound and inbound investments.

For South African multinationals investing abroad in low-tax jurisdictions like Ireland, Guernsey, or Jersey, an “income inclusion rule” will apply. 

If the average tax rate in the foreign jurisdiction is lower than 15% – for example, 12% – the company would need to pay the remaining 3% in South Africa.

Similarly, for multinational companies operating in South Africa but headquartered in countries that have not adopted the global tax rule, South Africa would also be entitled to apply the tax.

De Wet added that implementing the tax involves significant administrative effort, compliance requirements, and complex calculations. 

For companies, the primary challenge also lies in the administrative requirements for compliance. Companies remain uncertain about the specific forms and reporting standards required by SARS, which has yet to finalise the process. 

As a result, many businesses are concerned about the information they need to maintain and how they will meet these new obligations.