Finance Minister Enoch Godongwana in his budget speech on 21 February 2024, made a considerable number of administrative changes – one related to the corporate tax rate.
Finance Minister Enoch Godongwana. Image Credit: National Treasury
This change was not an increase – but far more complex.
One of the most significant provisions in the National Budget is the introduction of Pillar Two – a global minimum corporate tax rate of 15%. This aligns South Africa with global tax rules which are poised to significantly impact companies worldwide, as it establishes a uniform threshold for effective tax rates, irrespective of their location. For South African companies, adherence to this global standard means ensuring that their effective tax rate remains above 15%, aligning with the guidelines outlined by the Multilateral Instrument on Base Erosion and Profit Shifting (MLI).
The introduction of the Global Minimum Corporate Tax Bill – in which the details are contained, as well as the implications of different domiciles – marks a significant development in South African taxation, aimed at fostering tax equity and curbing tax avoidance practices. While the precise impact on companies remains to be seen, proactive engagement and adaptation will be crucial for businesses to negotiate this evolving tax landscape effectively.
Discussions surrounding the implementation of the global minimum tax will continue, meaning it remains to be seen how companies will navigate this new regulation. The enforcement of a minimum tax rate could prompt adjustments in corporate tax strategies and necessitate compliance measures to meet the prescribed thresholds. Furthermore, monitoring mechanisms will be essential to ensure adherence to these regulations and prevent circumvention of the minimum tax requirements.
The implementation of this global minimum tax applies from a minimum revenue threshold of EUR750-million for multinational corporations, encompassing entities with annual revenues exceeding this amount. While the specifics regarding the application of this threshold remain ambiguous, it underscores the far-reaching implications of this regulatory framework.
It’s necessary for corporates to gain understanding of the ramifications of this policy shift on businesses. Traditionally, corporate taxation incorporates various factors, including rebates, deductions and other allowances, which influence the effective tax rate. However, the introduction of a minimum tax rate at 15% imposes a floor, preventing companies from lowering their tax liability beyond this threshold. This could particularly impact companies accustomed to leveraging deductions and other tax optimisation strategies to reduce their tax burden.
The global minimum tax rate eliminates the possibility of profit-shifting to jurisdictions with lower tax rates, thereby promoting tax fairness and addressing tax avoidance practices.
