Dr. Albertus Marais is Director of Dispute and International Tax at AJM Tax.
Reforms aimed at international tax regulations have leveled the playing field for South Africa.
On July 1, 2021, it was announced that 130 countries and jurisdictions had joined a two-pillar plan to reform international tax rules and ensure that multinational corporations pay a fair share of tax wherever they operate. South Africa is one of those countries and there are some important benefits that can come from it.
The reforms should therefore not be seen in the light of a cheaper destination in South Africa, but rather that other jurisdictions are no longer available due to the perceived unfair tax advantages they grant.
It is often forgotten that the SA has taken a variety of measures to keep up with international developments in tax policy. An example of SA recently taking a step towards attractiveness is the announcement that it will cut our corporate tax rate from 28% to 27%, which is a corporate tax rate that is the same as the rest of the world.
As a result of the leveling of the playing field, SA is no longer “that bad” compared to other jurisdictions with uncompetitive tax systems, which makes it less attractive for multinational corporations to structure their business in such a way that tax consequences are outside SA, while these companies would otherwise still benefit from doing business in South Africa.
The framework updates key elements of the centuries-old international tax system that is no longer useful in a globalized and digitized economy of the 21st century. The aim is to stabilize the international tax system. To ensure that large multinational companies pay a fairer share, a minimum corporate tax rate of 15% has been proposed for participating countries.
The two-pillar package – the result of negotiations coordinated by the OECD for much of the past decade – aims to ensure that large multinational corporations (MNEs) pay taxes where they operate and make profits, and at the same time pay taxes much needed security and stability in the international tax system.
The global minimum corporation tax under the second pillar, with a minimum rate of at least 15%, is estimated to generate around 150 billion US dollars in additional global tax revenue annually.
Additional advantages result from the stabilization of the international tax system and the increased tax security for taxpayers and tax administrations.
That means no end to tax competition. Pillars 1 and 2 merely achieve a fairer international tax competition between the legal systems, in which companies are not attracted due to the constant so-called “race to the bottom”, in which the legal systems want to outdo each other with the most advantageous tax systems possible in order to attract business.
Whether a minimum corporate tax rate alone is sufficient and at whatever level is also discussed, but the initiatives of the two pillars 1 and 2 go far beyond the mere recommendation of a minimum corporate tax rate. A minimum tax rate will certainly have an impact on companies that are based in so-called “tax havens”.
Mauritius, for example, has long had an official corporate tax rate of 15%. However, in most cases it granted an 80% discount on taxable income (which lowered the effective tax rate in that country to 3% previously). This regime has recently been changed, mainly because the EU is putting pressure on this economy to reform if it wishes to remain trading partner of this bloc.
Ultimately, reducing inequality goes far beyond simply achieving tax equity in the international community. The countries support each other, in particular to ensure that the emerging countries can catch up on sustainable development at the level of the industrialized countries, especially the G7.
However, the international community alone cannot accept responsibility for the development of emerging economies, and in many cases developing country policies, including taxation, are ultimately the responsibility of those countries. While expertise can be provided to ensure these countries receive the best advice on how to proceed, including tax policy matters, ultimately each country’s political will is required to ensure that these often unpopular reforms are implemented.
Changes in tax rates are largely as they are and very little can be done about them. The fact is, however, that we live in a dynamic economic environment that is subject to constant changes, both at the political level and in the regulatory environment.
In this new environment, multinational companies should therefore make sure not only to design their business in such a way that they keep pace with technical changes, but also that structures that occurred earlier and which may at some point become obsolete.
A simpler, less expensive corporate structure in a more conventional legal system is becoming more and more appropriate today compared to legal systems involved in unfair tax competition.
This article was written exclusively to the Fin week‘s August 27th newsletter. Here you can subscribe to the weekly newsletter.