On 20 December 2024 the President assented to the Global Minimum Tax Act (the Act) which applies from 1 January 2024, and enables South Africa to impose a top-up tax (Top-up Tax) on multinational enterprise groups (MNE Groups). The administration of the Act is regulated by the Global Minimum Tax Administration Act (the Admin Act).
The Act is based on the GloBE Model Rules of the Inclusive Framework on Base Erosion and Profit Shifting (the Model Rules) as well as the commentary and administrative guidance on the Model Rules.
The rationale behind the Top-up Tax is to ensure that MNE Groups pay a minimum level of tax in every jurisdiction in which they operate.
The Act only applies to MNE Groups with a consolidated annual revenue of at least 750 million Euros in at least two of the four years preceding the relevant financial year (Threshold), and where the ultimate parent company of the MNE Group or at least one permanent establishment or entity is located within South Africa (MNE Entity/ies).
Liability to pay the Top-up Tax
The Top-up Tax is imposed on MNE Entities situated in South Africa in terms of the Domestic Minimum Top-up Tax rule (DMTT Rule), and on ultimate parent MNE Entities in South Africa in terms of the income inclusion rule (II Rule).
In terms of the DMTT Rule each MNE Entity situated in South Africa will be jointly and severally liable to pay the Top-up Tax determined for all MNE Entities in South Africa.
If the ultimate parent company of the MNE Group is situated in South Africa (SA UPE) and holds an ownership interest in a MNE Entity which is located in a jurisdiction with an accounting based effective tax rate that is lower than 15%, the II Rule provides that the SA UPE will be liable for a portion of the Top-up Tax of the low taxed MNE subsidiary. The portion of the Top-up Tax attributable to the SA UPE will be calculated in proportion with its ownership interest.
Calculation of Top-up Tax
When an MNE Group exceeds the Threshold, the Top-up Tax for MNE Entities, which is payable in terms of the Act, must be calculated in terms of the following (simplified) formula:
Top-up Tax = (15% - Effective Tax Rate) x (Net GloBE Income – Substance Based Income Exclusion)[1]
We discuss each element of this formula below.
Net GloBE Income
The Net GloBE Income is the sum of the financial accounting net income or loss for the MNE Entities of a specific jurisdiction prepared in terms of the consolidated financial statements of the ultimate parent entity of the MNE Group without accounting for any consolidation eliminations of intra-group transactions (Acc Income or Loss) and as adjusted in line with the Model Rules.
Effective Tax Rate
The Effective Tax Rate is not the corporate tax rate of a jurisdiction (27% in South Africa) but rather an accounting based percentage which is calculated by dividing the sum of the current tax expenses of all MNE Entities in that jurisdiction by the Acc Income or Loss of those MNE Entities.
Substance Based Income Exclusion
The Substance Based Income Exclusion is a favourable deduction comprising of 5% of the eligible payroll costs attributable to employees of MNE Entities in that jurisdiction as well as 5% of the carrying value of eligible assets of MNE Entities in that jurisdiction which assets include property, plant, equipment and natural resources licenses from Government.
Timelines
The Act has been in effect from 1 January 2024, therefore MNE Entities which may fall within the scope of the Act would need to consider its provisions carefully to determine what effect the Act will have on their tax liability.
The Admin Act provides that the first due date for filing returns and for payment to be made is 18 months after the end of the financial year which commenced in 2024.
