Minimum global corporate tax rate may give SA an edge

It was announced on 1 July 2021 that 130 countries and jurisdictions have joined a two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate. South Africa is one of those countries and there are some important benefits which may accrue.

The reforms should therefore not be seen in the light of SA becoming a more favourable destination, but rather that other jurisdictions are becoming less favourable due to perceived unfair tax advantages provided by them no longer being available.

It is often forgotten that SA has been adopting a wide range of measures to keep abreast of international developments on tax policy. An example where SA has recently made a step towards becoming more attractive, is the announcement that our corporate income tax rate is to be lowered from 28% to 27%, which is a corporate tax rate which is more in line with the rest of the world.  

As a result of the playing field being levelled, SA is no longer “that bad” compared to other jurisdictions where uncompetitive tax regimes exist, making it less attractive for multinational groups to structure their affairs to ensure that tax consequences fall outside of SA while those firms would otherwise still benefit from doing business in SA.

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. One measure to ensure large multinationals pay a fairer share, a minimum corporate tax rate of 15% has been proposed for participating countries.

The two-pillar package – the outcome of negotiations coordinated by the OECD for much of the last decade – aims to ensure that large multinational enterprises (MNEs) pay tax where they operate and earn profits, while adding much-needed certainty and stability to the international tax system.

Additional benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations. 

This does not mean an end to tax competition. All that pillars 1 and 2 achieve is to attempt a fairer international tax competition among jurisdictions whereby business is not attracted because of the constant so-called “race to the bottom” whereby jurisdictions want to outperform one another with as beneficial tax regimes as possible in order to attract business.

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. A minimum tax rate will certainly influence businesses being based in so-called “tax havens”.

Mauritius for example has for long had an official 15% corporate income tax rate. 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 reforms should it wish to remain a trading partner of that bloc.

The international community alone, however, cannot take responsibility for the development of emerging markets and in many instances the policies of developing countries, including tax policies, are ultimately the responsibility of those countries themselves. While expertise can be made available to ensure that these countries do receive the best advice on how to proceed with matters, including tax policy related matters, ultimately the political will of each country is required to ensure that these reforms, often unpopular, are pushed through.

To a large extent, changes in tax rates are what they are and very little can be done to mitigate against this. It is however so that we live in a dynamic economic environment and one which is the subject of constant changes, both on policy level as well as in the regulatory environment.

In this new environment, multinational companies should therefore ensure that their affairs are structured in such a way not only to keep up with the technical changes, but also to ensure that structures previously entered which may have been optimal at some stage, may have since become outdated.

A simpler, more cost-effective corporate structure in a more conventional jurisdiction is becoming more appropriate nowadays compared to engaging with jurisdictions involved in unfair tax competition.

By: Dr Albertus Marais