The SA Institute of Chartered Accountants (Saica) has hit out at the National Treasury’s proposed implementation of the global minimum tax on large multinationals retrospectively from January this year, saying such a move would be unfair.
The measure was also criticised by four NGOs during public hearings on Tuesday by parliament’s standing committee on finance, including the draft Global Minimum Tax Bill which seeks to impose a minimum 15% tax rate on multinationals.
Saica has recommended an effective date of January 1 2025.
Saica project director for tax advocacy Lesedi Seforo said the proposed implementation date meant companies with financial years ending in December 2024 would already be subject to the tax before the law is finalised and assented to by parliament.
“A fundamental principle of our law is a presumption against the retrospective application of legislative amendments. The law must be certain and accessible so that people can regulate their affairs accordingly,” Seforo said.
In terms of the draft Bill, which was first announced in the February budget, Sars will be able to collect a top-up tax for qualifying multinationals that pay an effective tax rate of less than 15% in SA.
The proposal stems from the OECD/G20 inclusive framework on base erosion and profit shifting under the leadership of the Organisation for Economic Co-operation and Development (OECD). The framework seeks to ensure that any multinational with annual revenue exceeding €750m in at least two of the four fiscal years immediately preceding the tested fiscal year will be subject to an effective tax rate of at least 15% regardless of where its headquarters, operations, sales or profits are located.
The aim of the measure is to prevent a so-called race to the bottom in terms of effective corporate tax rates for large multinationals, whereby countries compete to attract income by offering low tax rates and tax incentives. The Treasury said implementing the minimum tax in SA will bolster the corporate tax base.
The Alternative Information and Development Centre and the Institute for Economic Justice (IEJ), supported by Tax Justice Network Africa and #StopTheBleeding Campaign, said in a submission to committee they opposed the implementation of the OECD rules in SA.
They noted that the draft bill proposes to implement the OECD’s rules “by reference”. The draft bill doesn’t copy the rules into domestic law wholesale but instead incorporates direct references to the OECD rules. As the rules change their application in SA will also change automatically.
“This approach compromises public oversight over South African tax policy. Future changes will not pass through the legislative process because they are automatically applicable,” the NGOs’ submission says.
“There is a very high risk of future revisions to these documents in effect producing substantial changes to South African tax policy while bypassing public and parliamentary oversight processes.”
Instead the NGOs proposed that the bulk of the OECD rules be directly incorporated into the bill with substantial revisions introduced annually in a tax amendment bill. Alternatively, the finance committee and the public should be briefed on any relevant updates or revisions to the rules.
According to the NGOs, the Treasury said its approach would make it easy for multinationals to comply, because would need to comply with just one set of rules with no national deviations. The Treasury also said the OECD was developing a peer review mechanism to make sure each country’s legislation met the global standard. Such an approach would reduce the administrative cost for businesses.
Lower threshold
The NGOs also proposed that the threshold at which the minimum top up tax would apply be lowered to a level that would ensure no multinational paid less than 15% tax in SA.
“In SA only 17 multinational enterprises, out of 243 that are headquartered in the country, fall above this threshold according to the University of Cape Town Tax Research Institute. This is only 7.3%. According to the Treasury’s assessment, the number is around 44, but this is still only 18%,” the NGOs said.
“This limits potential benefits to a relatively small number of very profitable foreign [multinationals].”
The Treasury estimates that implementation of the minimum tax will generate R8bn in 2026/27, but the NGOs said this was negligible compared with the more than R50bn SA loses to tax-motivated illicit financial flows and the R100bn lost to tax evasion each year.
The NGOs also objected to the proposed minimum tax rate of 15% on all multinational companies, saying it was equivalent to the tax benefit granted to companies operating in special economic zones, and well below the statutory minimum corporate tax rate of 27%. The proposed rate would therefore primarily affect multinationals benefiting from tax incentives that reduce their effective tax rate to less than 15%.
“Because of these concerns, we ultimately do not recommend the implementation of the OECD GloBE (Global anti-base erosion) model rules in SA,” the NGOs said.
James Coutinho, the Association for Savings and Investment SA representative said that without relief the local and foreign investments the country’s life assurers hold would be subject to the global minimum tax, affecting policyholders. He said Treasury had taken these concerns to the OECD, which was considering them.
PwC tax policy leader Kyle Mandy said the minimum tax would potentially undermine the tax incentive for electric vehicles and reduce the effective tax rate of vehicle manufacturers below the minimum 15%. He suggested the tax incentive could be converted into a refundable tax credit.
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