South Africa Gazettes its Global Minimum Tax Act

Legislation

On December 24, 2024, South Africa published the Global Minimum Tax Act, 2024 (the ‘GMT Act) in its Official Gazette. This follows the Global Minimum Tax Bill and the Global Minimum Tax Administration Bill (the ‘GMT Administration Bill’) that were previously were sent to the National Assembly on October 30, 2024.

The GMT Act includes an Income Inclusion Rule (IIR), and a domestic minimum tax (intended to be a QDMTT) for fiscal years beginning on or after January 1, 2024.

The Under-Taxed Profits Rule (UTPR) is not included in the GMT Act.

The GMT Act does not attempt to redraft the OECD Model Rules, instead it transposes the OECD Model Rules (and Administrative/Other Guidance) into South African Law by way of a direct dynamic reference in Part II of the GMT Act.

General

Part II of the GMT Act transposes the OECD GloBE Model Rules into South African legislation by reference to the GloBE Model Rules, Commentary and Agreed Administrative Guidance. A dynamic reference is provided in Section 2 and 3 of the GMT Act. In the Explanatory Notes to the GMT Bill this is confirmed as an ‘ambulatory’ approach.

This means that the reference in domestic law updates every time the Commentary and Administrative Guidance is updated providing the Minister publishes a notice in the Official Gazette.

Section 2 of the GMT Act provides that, under this approach, when applying the GloBE Model Rules and Commentary, the most recent version of the Commentary will apply (updated by any Administrative Guidance that has been published before the start of the fiscal year) in respect of calculations that are being performed.

Section 3 of the GMT Act states that wherever the GloBE Model Rules refer to the term “[insert name of implementing jurisdiction]” this is treated as referring to South Africa.

Section 4 of the GMT Act specifically applies the top-up tax calculation in the GloBE Model rules for the purposes of the IIR.

Certain provisions of the OECD Model Rules are specifically excluded in Section 5 of the GMT Act as they relate to the UTPR which is not being implemented in South Africa. This includes Articles 2.4 to 2.6 (UTPR charging provisions) and Article 9.3 (exclusion from the UTPR of MNE Groups in the initial phase of their international activity)).

Administrative Guidance

Section 2 of the GMT Act states that the application of the GloBE Model Rules in South Africa is to be determined in accordance with the Administrative Guidance to the GloBE Model Rules before the start of the Fiscal Year in which the time falls. The applicable OECD Administrative Guidance defined in Section 1 of the GMT Act includes the February 2023, July 2023 and December 2023 OECD Administrative Guidance, as well as ‘any similar document subsequently released by the Inclusive Framework’ (where that has been approved by the Minister).

Additionally the most recent version of the OECD Commentary will apply (updated by any Administrative Guidance that has been published before the start of the fiscal year) in respect of calculations that are being performed.

Therefore, all aspects of all of the OECD Administrative Guidance released up to and including the December 2023 OECD Administrative Guidance would apply for South African purposes.

Safe Harbour and Penalty Relief Guidance

Section 2 of the GMT Act states that the application of the GloBE Model Rules in South Africa is determined in accordance with the Safe Harbours before the start of the Fiscal Year in which the time falls.

Safe Harbours are defined in Section 1 of the GMT Act as exceptions provided in Article 8.2.1 of the GloBE Model Rules which have been approved by the Inclusive Framework and set out in:

1. The OECD Safe Harbours and Penalty Relief Guidance;
2. The OECD Administrative Guidance; and
3. Any similar document subsequently released by the Inclusive Framework (subject to Ministerial approval in the Gazette).

As such, all Safe Harbours included in the OECD Safe Harbour Guidance and OECD Administrative Guidance are transposed into South African Law. This includes the:

–Transitional CbCR Safe Harbour

–QDMTT Safe Harbour

–NMCE Simplified Calculations Safe Harbour.

Domestic Minimum Tax

Part IV of the GMT Act includes a domestic minimum tax that is likely to be a QDMTT. This allows South Africa to levy top-up tax on the profits of low-taxed South African -based entities of MNE groups that don’t have a UPE in South Africa.

The calculation of the QDMTT is relatively straightforward. In particular it applies the top-up tax calculated under the general GloBE rules and then subjects this to a number of adjustments.

Section 8 of the GMT Act provides that the domestic minimum tax applies to Domestic Constituent Entities and the starting point is that it is calculated in accordance with the Model GloBE Rules.

Section 9 of the GMT Act then excludes a number aspects of the Model GloBE Rules from the domestic minimum tax calculation.

These are:

Exclusions

Provisions that Allocate Top-Up Tax

Provisions of the GloBE Model Rules that allocate the Jurisdictional Top-up Tax to individual Constituent Entities do not apply, because the domestic minimum tax charges the total Jurisdictional Top-up Tax so it is not necessary to allocate this between Constituent Entities.

As such the following Articles of the OECD Model Rules are not relevant for domestic minimum tax purposes:

-Article 5.2.4 (allocation of Top-up Tax amongst Constituent Entities);

-Article 5.2.5 (allocation of Top-up Tax amongst Constituent Entities when no Net GloBE Income for Fiscal Year);

-Article 5.4.2 (allocation of Additional Current Top-up Tax in connection with Article 5.4.1);

-Article 5.4.3 (allocation of Additional Current Top-up Tax in connection with Article 4.1.5);

-Article 5.4.4 (determination as Low-taxed Constituent Entity).

Specific Structures

Certain provisions of the Model GloBE Rules modify how the GloBE rules apply to certain  structures. These do not need to be incorporated into the domestic minimum tax eg as they are not relevant for South African tax purposes. This includes:

-Article 6.2.1(h) of the Model GloBE Rules which applies where a target is required to apply the IIR as a Parent Entity of one or both MNE Groups. It provides that the target shall apply the IIR separately to its Allocable Shares of the Top-Up Tax of Low-Taxed Constituent Entities determined for each MNE Group.

-Articles 6.4.1(b) and 6.4.1(c) which describes how the IIR and UTPR is applied to Joint Ventures (JVs) and JV Subsidiaries.

-Article 6.5.1(e) and (f) that describes how the IIR and UTPR is applied in the context of a Multi-Parented MNE Group.

-Article 7.3 of the GloBE Model Rules (Eligible Distribution Tax Systems) as this only applies to a jurisdiction that had a distribution tax system prior to July 1, 2021.

-Article 9.3 of the GloBE Model Rules that applies an exclusion from the UTPR of MNE Groups in the initial phase of their international activity

Pushdown Taxes

The GloBE Model Rules stipulate that the Adjusted Covered Taxes for each Domestic Constituent Entity are to be calculated by including any tax accrued by a Constituent Entity-owner located in another jurisdiction with respect to the GloBE Income of a Domestic Constituent Entity. The GloBE rules that allocate taxes of a Constituent Entity-owner are:

-Article 4.3.2(a) of the GloBE Model Rules which allocates taxes to a Permanent Establishment,

-Article 4.3.2(c) of the GloBE Model Rules which allocates taxes to a controlled foreign company; and

-Article 4.3.2(d) of the GloBE Model Rules which allocates such taxes to hybrid entities.

The February 2023 OECD Guidance provides that these allocations must be disregarded for a domestic minimum tax to qualify as a QDMTT.

In addition, it provides that taxes on dividends or other distributions that would otherwise be allocated to a distributing Domestic Constituent Entity under Article 4.3.2(e) of the Model GloBE Rules shall also be excluded from the DMTT calculation.

Section 12 of the GMT Act excludes all of these allocations for the purposes of the South African domestic minimum tax.

Exclusion of domestic taxes on certain foreign income

Section 13 of the GMT Act provides that the Adjusted Covered Taxes for each Domestic Constituent Entity are to be calculated excluding tax accrued by Domestic Constituent Entities with respect to the income of, or dividends received from, Constituent Entities located in another jurisdiction.

Ownership Interests

In order for a domestic top-up tax to be a QDMTT, the OECD Administrative Guidance provides that Top-up Tax that is subject to the QDMTT must be based on the whole amount of the Jurisdictional Top-up Tax calculated, irrespective of the Ownership Interests held in the Constituent Entities located in the QDMTT jurisdiction by any Parent Entity of the MNE Group.

This is provided in Section 14 of the GMT Act.

Avoiding Circularity

In order to avoid circularity, the top-up tax calculation formula for the QDMTT must be amended so that the QDMTT itself is not deducted. Section 16 of the GMT Act provides for this.

Separate ETR Calculations

Section 16 of the GMT Act provides for separate Domestic Minimum Top-up Tax calculations for Minority-Owned Constituent Entities, Investment Entities, Domestic Joint Venture Groups and other Domestic Constituent Entities.

Accounting Standard

The South African QDMTT applies the general GloBE rules to determine the accounting standard used. As such, the domestic minimum tax is calculated using the financial accounting standard of the UPE, and, if that is not practicable, on the basis of an accepted accounting standard or an approved accounting standard, if:

• the constituent entity’s financial statements are prepared in accordance with that standard,
• the information contained in the financial statements is reliable; and
• permanent differences of more than EUR 1 million are conformed with the UPEs accounting standard.

Safe Harbours

As noted above, the OECD Safe Harbours are transposed into domestic law, however, Section 11 of the GMT Act excludes the QDMTT Safe Harbour for QDMTT purposes.

Transition Years

Sections 17-19 of the GMT Act apply the approach taken in the OECD Commentary to cases where the first Fiscal Year that a QDMTT applies to domestic Constituent Entities located in South Africa is before or after the first Fiscal Year in which the GloBE Rules apply to those Constituent Entities. In particular, various tax attributes are amended as provided in paragraphs 118.49.1 and 118.49.2 of the OECD Commentary.