The BEPS Project: Introducing the Two-Pillar Solution and implementation framework in South Africa

The shifting of profits by multinational enterprises (MNEs) to lower or no-tax jurisdictions has an adverse impact on economies globally as this practice (amongst others) erodes the tax base in countries with higher tax rates and undermines the integrity of tax systems, often taking undue advantage of developing countries and low-income jurisdictions.

24 Feb 2022 3 min read 2022 Special Edition Budget Speech Alert Article

In order to curb tax base erosion and profit shifting (BEPS), the Organisation for Economic Co-operation and Development (OECD) (in conjunction with the G20) first introduced the BEPS Project in 2013 with the 15-point Action Plan announced in 2015. The BEPS Project aims to ensure that profits are taxed in the jurisdiction where the economic activities generating such profits are performed.

On 8 October 2021, the members of the OECD/G20 Inclusive Framework on BEPS (Inclusive Framework) agreed to the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (2021 Statement). This statement contains the Two-Pillar Solution that is intended to establish a new framework for international tax, as well as a detailed implementation plan that envisages the implementation of this new framework by 2023. The CDH Tax & Exchange Control Department previously discussed the Two-Pillar solution in a Tax Alert article published on 9 December 2021, however, as a brief summary:

  • Pillar One aims to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs operating in those countries. An important element in respect of the implementation of Pillar One is the removal of digital service taxes and other similar measures.
  • Pillar Two encompasses the imposition of (1) a global minimum tax rate of 15% on specified entities (which will operate as a top up tax) and (2) limited source taxation on certain related party payments that are subject to tax below a minimum rate.

The OECD/G20 is developing a multilateral convention and a supplementary explanatory statement that will facilitate the implementation of Pillar One between different jurisdictions. In addition, model rules and a model treaty provision will be developed to give effect to Pillar Two. It is the intention of the inclusive framework to finalise the implementation of both Pillar One and Pillar Two by 2023.

In the 2022 Budget Speech it was announced that local legislative amendments to implement Pillar One and Pillar Two in South Africa will be proposed once the implementation framework for the Two-Pillar Solution has been finalised by the OECD/G20 and has been translated into a local context.

Given the extent of jurisdictions involved and the aim to reach consensus-based solutions, there have been various delays in the publication of the various framework documents by the OECD/G20 and it is unclear whether the intended 2023 deadline for the publication of the complete implementation framework will be met. In any event, the Minister of Finance has made it apparent that the National Treasury will be unable to make the necessary local legislative proposals until such time as the implementation framework has been completed by the OECD/G20.

While the MNEs that will be affected by the implementation of Pillar One and Pillar Two may benefit from these delays, they should nevertheless take cognisance of the changes that are likely to come as these are expected to be significant considering the agreed upon Two-Pillar Solution.

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