Dr Albertus Marais, AJM Tax
The two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate, is a step in the right direction with potential benefits for South Africa’s economy, says AJM Tax.
Director of disputes and international tax at AJM Tax, Dr Albertus Marais, says the playing field is being levelled and this means South Africa is no longer “that bad” compared to other jurisdictions where uncompetitive tax regimes exist.
The framework updates key elements of the century-old international tax system, which is no longer fit for purpose in a globalised and digitalised 21st century economy. The aim is to stabilise the international tax system and ensure large multinationals pay a fairer share, with a minimum corporate tax rate of 15% proposed. The minimum rate is estimated to generate around USD 150 billion in additional global tax revenues annually.
“It is now less attractive for multinational groups to structure their affairs in such a manner that it results in taxes not being paid to South Africa, yet they still benefit from doing business in this country. So the reforms should not be seen in the light of South Africa becoming a more favourable destination, but rather that other jurisdictions become less favourable, or more competitive,” he says.
An example where South Africa has recently made a step towards becoming more attractive is the announcement that its corporate income tax rate is to be lowered from 28% to 27%, which brings it more in line with the rest of the world.
SA is one of the key partners to the OECD and is one of the 130 signatories of the framework.
Marais explains that pillar one will ensure a fairer distribution of profits and taxing rights among countries with respect to the largest multinational enterprises (MNEs), including digital companies. It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there. Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases.
The changes will not end tax competition, but they could make businesses think harder about how they structure their tax affairs.
“All that pillars 1 and 2 achieve is to move towards fairer international tax competition among jurisdictions where business is not attracted as a result of the so-called ‘race to the bottom’ – jurisdictions trying to outperform one another with as beneficial tax regimes as possible in order to attract business,” explains Marais.
“It is perhaps a slow start, but it is a start nonetheless. Whether a minimum corporate income tax rate on its own is enough and at whatever rate, is also to be debated, yet the initiatives of both pillars 1 and 2 are far wider than simply recommending a minimum corporate income tax rate,” says Marais.
The minimum tax rate should impact business based in so-called “tax havens”.
“Mauritius for example has for long had an official 15% corporate income tax rate. In reality though, it used to grant an 80% rebate against taxable income in most instances (reducing the effective tax rate in that country to 3% previously). This regime was recently changed, largely due to the EU putting pressure on that economy to enter into reforms should it wish to remain a trading partner of that bloc,” says Marais.
Multinationals should ensure they keep up with the everchanging environment from a technical point of view, but also review corporate structures previously created and which may have been optimal at some stage, may have since become outdated.
“We live in a dynamic economic environment and one which is the subject of constant changes, both on the policy level as well as in the regulatory environment. A simpler, more cost-effective corporate structure in a more conventional jurisdiction may actually now be more appropriate compared to engaging with jurisdictions in uncompetitive tax jurisdictions,” concludes Marais.