ATC241125: Report of the Standing Committee on Finance on the Global Minimum Tax Bill [B20 - 2024] (National Assembly - section 77), dated 20 November 2024

Finance Standing Committee

2. Report of the Standing Committee on Finance on the Global Minimum Tax Bill [B20 - 2024] (National Assembly - section 77), dated 20 November 2024

The Standing Committee on Finance, having considered the Global Minimum Tax Bill [B20 - 2024] (National Assembly - section 77) referred to it, and classified by the JTM as a Money Bill, reports the Bill as follows:

 

1. INTRODUCTION
   1. The Global Minimum Tax Bill, 2024 sets out South Africa’s adoption of the OECD/G20 Inclusive Framework's Global Anti-Base Erosion (GloBE) Rules to impose a minimum level of tax on large multinational enterprises (MNEs) operating within its jurisdiction. The Bill introduces the GloBE Rules in South Africa, which aim to prevent tax base erosion by ensuring MNEs pay a minimum tax rate on income generated in each jurisdiction where they operate.

 

2. PUBLIC PARTICIPATION
   1. The draft of this Bill, published for public comment on 21 February 2024, proposes to incorporate elements of the OECD’s Global Anti-Base Erosion (GloBE) model to ensure a minimum effective tax rate of 15% on large multinational enterprises operating in South Africa. Public workshops on 6 and 7 June 2024 provided stakeholders the opportunity to discuss South Africa’s alignment with international tax standards. The Bill reflects the Treasury’s efforts to prevent base erosion and profit shifting by applying global standards while engaging stakeholders to consider the unique challenges faced by South African entities.
   2. On 17 September 2024, NT and SARS briefed SCoF on the Draft Tax Bills. These include the Rates Bill, the 2024 Draft Taxation Laws Amendment Bill (TLAB), the 2024 Draft Tax Administration Laws Amendment Bill (TALAB), the Global Minimum Tax Administration Bill, and this Bill.
   3. Following this briefing, SCoF issued a call for public comments and held public hearings on 8 and 9 October 2024, where stakeholders made written and oral submissions on the draft bills. These sessions allowed stakeholders to discuss and raise issues concerning the proposed tax legislation.
   4. On 23 October 2024, National Treasury and SARS presented to the Committee the Draft Response Document related to all the public comments and deliberations by the Committee on the draft bills. This document summarized the initial responses of National Treasury and SARS officials to the public feedback received during the public participation process, outlining the proposed actions to address the main issues raised.
   5. Following the public hearings and responses by NT and SARS, the Bills were presented to the Minister of Finance for approval. This included the Minister’s review and potential approval of any consequential amendments to the draft bills. After the final revisions made as a result of public comments, the Minister formally introduced or tabled the bills in Parliament on 30 October 2024.
   6. During the departmental consultation and the public participation process with the Committee, a total of 65 organizations and six individuals submitted comments, to which NT and SARS provided responses. This extensive engagement included a diverse group of stakeholders representing various industries, professional associations, educational institutions, government departments, and individual professionals.
   7. This process of consultation and public participation reflects a comprehensive engagement, enabling NT and SARS and the Committee to consider a wide range of views and concerns, ultimately facilitating more informed and inclusive law-making for this Bill.

 

3. KEY PROVISIONS
   1. The Preamble highlights South Africa's participation in the OECD/G20 Inclusive Framework on BEPS (Base Erosion and Profit Shifting) and its intent to address tax challenges arising from the digital economy. This legislative move ensures MNEs pay a baseline tax rate in South Africa, aligning with global efforts to mitigate profit-shifting.

Part I: Interpretation

1. Clause 1 provides key definitions, including "Administrative Guidance to the GloBE Model Rules," "GloBE Model Rules," "Safe Harbour," and "Top-up Tax." These definitions ensure consistency with the international GloBE Model Rules and contextualize how South Africa interprets and applies them.

Part II: Application of GloBE Model Rules

1. Clause 2 and Clause 3 specify the application of GloBE Model Rules in South Africa, with any jurisdictional reference substituted with "the Republic." This part outlines that GloBE Model Rules, along with related guidance and safe harbors, apply each Fiscal Year as per their latest version prior to the start of that year.

Part III: Income Inclusion Rule

1. Clause 4 imposes a Top-up Tax on Domestic Constituent Entities of an MNE Group based on the Income Inclusion Rule (IIR) of the GloBE Model Rules. Clause 5 specifies inapplicable articles, exempting certain provisions, such as UTPR charging provisions and exclusions for MNEs in the initial phase of international activity.

Part IV: Domestic Minimum Top-up Tax

1. This part introduces the Domestic Minimum Top-up Tax applicable to MNE Groups and Domestic Joint Ventures. Clause 6 and Clause 7 impose joint liability for Top-up Tax on Domestic Constituent Entities and Domestic Joint Ventures, respectively. The tax amount is determined under GloBE Model Rules as modified by this Act.
2. Clause 8 details the calculation for Domestic Minimum Top-up Tax. In addition, Clause 9 specifies which GloBE Model Rule articles are inapplicable, such as allocation rules and certain provisions related to low-taxed entities. Clause 10 excludes the Qualified Domestic Minimum Top-up Tax definition except for specific transfer purposes. Clause 11 excludes the GloBE Commentary’s Safe Harbour provisions for Domestic Constituent Entities.
3. Clause 12 and Clause 13 provide exclusions from Adjusted Covered Taxes for specific foreign and domestic taxes, ensuring a clear distinction in calculating covered taxes.
4. Clause 14 and Clause 15 outline the total Top-up Tax for Domestic Constituent Entities and Domestic Joint Venture Groups, with Clause 16 presenting the formula for calculating Domestic Minimum Top-up Tax, tailored for entities such as minority-owned and investment entities.

Part V: Imposition of and Liability for Top-up Tax

1. Clause 20 establishes the imposition of Top-up Tax, with proceeds going to the National Revenue Fund. Clause 21 clarifies that Domestic Constituent Entities, Domestic Joint Ventures, and Domestic Joint Venture Subsidiaries are taxpayers for this purpose and must comply with payment deadlines as outlined in the Global Minimum Tax Administration Act. Clause 22 states that if Top-up Tax is calculated in a foreign currency, it must be converted to Rands using the average exchange rate as defined in the Income Tax Act.

Part VI: General Provisions

1. Clause 23 allows the Minister to specify updates to international standards and guidance from the Inclusive Framework, subject to approval in the Government Gazette. These updates lapse at the end of the next calendar year unless otherwise renewed by Parliament. Clause 24 permits the Minister to issue regulations related to procedural or ancillary matters necessary for implementing this Act effectively. Clause 25 provides the short title, Global Minimum Tax Act, 2024, with retroactive effect from 1 January 2024, applying to Fiscal Years beginning on or after that date.
2. This Bill aligns South Africa’s tax regime with international standards, ensuring that large MNEs contribute a fair level of tax to South Africa’s economy in line with global anti-tax base erosion objectives.

 

4. PUBLIC SUBMISSIONS AND RESPONSES BY NT AND SARS
   1. The public submissions on the draft GMT Bill reflect a wide range of perspectives, with stakeholders raising both technical and policy-related concerns. Responses by NT and SARS addressed these submissions, often clarifying provisions or justifying the proposed measures.
   2. Several stakeholders raised concerns about timing mismatches between South Africa's corporate income tax filing requirements and the global minimum tax (GMT) timelines. NT noted that affected taxpayers could reopen their tax returns to update foreign tax credit sections, emphasizing this process was designed to accommodate the Global Anti-Base Erosion (GloBE) rules without overhauling existing systems. Concerns about life insurance entities' treatment under the rules, particularly regarding tax transparency elections for investment funds, were resolved through consultations with the OECD, confirming the election's applicability.
   3. Stakeholders expressed unease over the retroactive application of the GMT, as it would apply to multinational enterprises (MNEs) with fiscal year-ends in December 2023, before legislative finalization. NT rejected these claims, arguing that South Africa’s intent to implement the GloBE rules had been long stated in budgetary documents, aligning the legislation's timeline with that of other jurisdictions such as Australia and Canada. Concerns about the accuracy of MNE thresholds were also addressed, with NT confirming that 44 South African companies met the EUR 750 million threshold, not the initially stated 17.
   4. Policy-related submissions included calls for coordination with the Department of International Relations and Co-operation (DIRCO) to align with African initiatives on global tax reform. NT clarified ongoing collaboration with DIRCO and justified proceeding with the OECD framework, emphasizing the importance of securing South Africa’s tax base while broader international reforms are debated. Calls to delay implementation until the UN Tax Cooperation Framework is advanced were similarly rejected, with NT arguing that the OECD framework ensures South Africa retains taxes that would otherwise be collected abroad.
   5. Technical clarifications were also requested regarding the incorporation by reference of the GloBE Model Rules. Stakeholders were concerned that automatic updates to these rules would bypass domestic legislative scrutiny. NT addressed these concerns by updating the Bill to enable the Minister of Finance to incorporate model rule updates while ensuring parliamentary oversight, following practices used in existing South African legislation like the Customs and Excise Act.
   6. Compliance and reporting burdens for MNEs were another focal point. NT emphasized that many South African MNEs already comply with similar rules internationally, and transitional simplifications, such as safe harbors and simplified reporting regimes, would ease the adjustment process. Concerns about competitive disadvantages for South African MNEs implementing the GloBE rules earlier than peers were dismissed, with NT clarifying that the rules prevent income from escaping the minimum tax rate, even in non-implementing jurisdictions.
   7. Stakeholders sought clarity on the treatment of domestic entities, including partially owned parent entities, and how the rules interact with existing Controlled Foreign Company (CFC) regulations. NT provided detailed explanations, ensuring that the GMT rules complemented rather than replaced South Africa’s CFC regime, capturing income shielded by CFC exemptions. NT also incorporated clarifications into the Explanatory Memorandum to address the rules for intermediate parent entities and their responsibilities.
   8. NT and SARS demonstrated responsiveness to technical issues, adjusting the Bill where necessary and providing detailed explanations for decisions to maintain South Africa’s alignment with the GloBE Model Rules. This proactive approach ensures South Africa’s participation in a coordinated global tax system while addressing stakeholder concerns to balance compliance obligations with economic competitiveness.

 

5. COMMITTEE OBSERVATIONS AND RECOMMENDATIONS
   1. The Committee recognizes the significance of the Global Minimum Tax Bill, 2024, in aligning South Africa's tax system with global standards under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The Bill introduces key measures to address tax base erosion, ensuring that large multinational enterprises operating within South Africa pay a minimum effective tax rate of 15%. This legislation is crucial to protecting South Africa’s tax base and securing revenues that would otherwise be subject to top-up taxation by other jurisdictions.
   2. The Committee notes the extensive public participation process facilitated by NT and SARS. This engagement, which included submissions from diverse stakeholders, demonstrates the government’s commitment to inclusive and transparent law-making. The consultation process has enriched the Bill through technical clarifications and policy refinements to address practical challenges raised by stakeholders.
   3. The Committee acknowledges stakeholder concerns about the retroactive application of the Bill, given its effective start date of January 1, 2024. However, it supports NT's justification that early implementation is necessary to prevent tax revenues from being diverted to jurisdictions that have already adopted the Global Anti-Base Erosion rules. The Committee agrees that the 18-month transitional period for filing obligations provides sufficient time for affected MNEs to adjust.
   4. The Committee welcomes NT's amendments allowing for parliamentary oversight of updates to the GloBE Model Rules, ensuring that automatic incorporation of international standards does not bypass domestic legislative scrutiny and approval. This balance between aligning with international frameworks and preserving national sovereignty is critical to ensuring South Africa’s unique economic context is considered.
   5. The Committee observes that concerns regarding compliance burdens on MNEs were addressed through transitional safe harbours and simplified reporting regimes. These measures demonstrate a pragmatic approach to easing the adjustment for businesses while maintaining the integrity of the tax framework. The Committee commends NT and SARS for their proactive efforts to mitigate administrative challenges and compliance costs.
   6. Stakeholder calls for enhanced coordination with DIRCO on African tax initiatives were noted. The Committee urges NT to continue these efforts, ensuring that South Africa's implementation of the OECD framework aligns with broader continental goals, such as advancing the UN Tax Cooperation Framework.
   7. The Committee also notes the alignment of the Bill with existing Controlled Foreign Company (CFC) legislation, ensuring that South Africa’s tax system effectively captures income shielded by CFC exemptions. The clarifications provided in the Explanatory Memorandum regarding intermediate parent entities and minority-owned entities enhance the Bill’s operational clarity.
   8. Recommendations:
      1. The Committee recommends that NT ensures robust parliamentary oversight for any updates to the GloBE Model Rules incorporated by reference, maintaining transparency and legislative accountability.
      2. NT and SARS should continue to engage with stakeholders during the implementation phase, addressing emerging challenges and refining administrative processes, particularly for notification and reporting obligations.
      3. SARS should enhance its capacity to manage the administrative requirements of the Global Minimum Tax framework, including processing GloBE Information Returns and resolving compliance issues efficiently.
      4. The Committee encourages NT to strengthen its collaboration with DIRCO and other African countries to harmonize regional tax policies and advance the continent’s role in global tax reform discussions.
      5. The Committee recommends an annual review of the Bill’s implementation to assess its effectiveness in achieving its objectives and identify areas for improvement, particularly in reducing compliance costs for MNEs.
      6. NT and SARS should intensify efforts to educate affected businesses on their obligations under the Bill, ensuring that MNEs are well-prepared to comply with the new rules.

 

6. CONCLUSION
   1. The Committee supports the Global Minimum Tax Bill, 2024 as a critical step in aligning South Africa’s tax framework with international standards under the OECD/G20 Inclusive Framework. By introducing the GloBE Rules, the Bill ensures that multinational enterprises operating in South Africa pay a fair share of tax, safeguarding the domestic tax base and addressing global tax base erosion. The Committee acknowledges the efforts of NT and SARS in refining the Bill through public consultation, addressing stakeholder concerns, and balancing global consistency with domestic legislative oversight. It further endorses the Bill's timely implementation from January 1, 2024, to prevent potential revenue losses to other jurisdictions while appreciating transitional measures to ease compliance for affected entities. The Committee underscores its commitment to monitoring and ensuring oversight and accountability on the Bill's administration to ensure its effectiveness in achieving South Africa’s fiscal and economic objectives.

 

The MKP reserve their position, and the EFF objects the report.

 

Report to be considered.