South Africa has joined 130 other countries in calls to introduce a global tax.
In talks held by the Organisation for Economic Cooperation and Development (OECD) at the end of June, the countries agreed to a plan to set a minimum corporate tax rate and establish a new regime for sharing the taxes imposed on the profits of multinational firms.
This will see the implementation of a two-pillar package that will result in a fundamental shift in the way international taxation has worked in the past, say tax experts at Webber Wentzel.
“The first pillar was designed to find a more equitable way of taxing multinational digital businesses (e.g. Google, Amazon, Netflix, Facebook), since they currently pay taxes in a different jurisdiction from those market jurisdictions where they earn significant revenue.
“However, this pillar will impact more than the traditional digital economy as it will affect any multinational business with similar consumer facing characteristics.”
The second pillar is aimed at a global levelling of tax rates by applying a top-up tax, using an effective tax rate test, to achieve a minimum effective direct tax rate across the globe of 15%.
This is the pillar that will likely have the most immediate impact on revenue collection by SARS, said Webber Wentzel.
“The changes brought about by the agreement on the framework will not be immediate or rapid as they will require each participating country to revise domestic tax laws and enter into revised bilateral treaties.
“Implementation will also likely require each country to sign an overarching multilateral instrument (MLI).
“In South Africa, the MLI will take effect once the agreement is approved by parliament and published in a government gazette.”
Pillar one – SARS will have its (VAT) cake and eat it too
Under pillar one, multinational companies with global turnover above €20 billion and a profit margin of over 10% will have to pay tax in jurisdictions where they earn at least €1 million (or €250,000 in smaller countries) in revenue from products used or consumed.
“To address revenue leakage, some countries have already introduced a digital services tax (DST) as a unilateral measure in advance of these proposals. South Africa has not yet introduced a DST but has begun work on it,” Webber Wentzel said.
“Countries that have implemented DST do so in various ways, such as through a withholding tax, income tax on the “digital marketplace” or tax on importation of digital services or products.
“These are unilateral measures which do not allow the company paying the tax to offset it in other jurisdictions. Pillar one requires removal of all DST and relevant similar measures on all companies.”
Pillar one relates only to direct taxes, not to VAT. Many countries, including South Africa, earn VAT from the sale of digital products and services which is paid by the end-consumer, not by the multinational business, said Webber Wentzel.
These countries will likely not need to restructure their VAT rules to implement this pillar as VAT is a consumption tax on the consumer or recipient and Pillar One affects income taxes levied on the supplier.
“In theory, pillar one would benefit South Africa and other markets for digital services and products in that the fiscus would be able to levy taxes on an area of economic activity that is not currently being taxed.
“Thus, if foreign multinationals generate income in South Africa in excess of €1 million, South Africa should be able to get a slice of the tax pie.
“Further, it is unlikely that South Africa’s largest multinationals will meet the Euros 20 billion in global turnover and 10% profit margin threshold requiring them to give up a slice of the pie to other jurisdictions.”
Pillar two – South Africa should reduce corporate tax rates further
A number of South African corporations, mainly those doing business in African countries where effective corporate tax rates are relatively high, have used low-tax jurisdictions such as Mauritius or the Seychelles to operate intermediary holding companies or centralised operations to manage their effective tax rates, using the low tax jurisdictions to balance the high tax rates in Africa.
These companies will likely be affected by pillar two of the framework, said Webber Wentzel.
“These companies will see their effective tax rates adjusted to a minimum of 15% once the MLI implementing this pillar is given effect.
“There will be no way to avoid the increase in their tax rate from almost zero to at least 15%, but it can be planned for.”
The unfortunate effect of pillar two may be that companies will be increasingly averse to doing business in higher tax jurisdictions, since they can no longer offset those rates, and may switch their focus to more developed countries where corporate tax rates are lower, the law firm said.
“Some large, fast-growing markets (such as Nigeria or Kenya) will remain appealing, but countries like South Africa, with negative GDP growth and higher corporate tax rates, are likely to be left behind.
“Some countries, like Mauritius, Singapore or Hong Kong, which have positioned themselves as lower-tax economic hubs, will lose some of their attractiveness. However, the extent of in-country infrastructure will also play a part in attracting multinational businesses.”
“More positively, in the long run, Pillar Two may encourage developing countries with high tax rates, including South Africa, to make downward adjustments to their corporate tax, or if this would result in a tax shortfall make greater efforts to incentivise foreign investment.”