Post MLI Ratification – developments regarding pillar one and pillar two

In 2022, South Africa finally ratified the multilateral instrument (MLI), marking a significant event in a long-running process. The effect of the MLI was to amend a number of South Africa’s double tax agreements, but how South Africa will implement OECD/G20 Inclusive Framework, comprising Pillar One and Pillar Two, remains to be seen.

1 Mar 2023 2 min read Special Edition Budget Alert Article

At a glance

  • South Africa ratified the multilateral instrument (MLI) in 2022, amending its double tax agreements, but implementation of the OECD/G20 Inclusive Framework's Pillar One and Pillar Two remains uncertain.
  • Pillar One aims to address the taxation of technology companies and base erosion, but no final agreement or legislative amendments have been reached yet.
  • Pillar Two focuses on ensuring a minimum effective tax rate of 15% for large multinationals, and South Africa plans to publish a draft position on its implementation and prepare draft legislation for the 2024 Taxation Laws Amendment Bill.

Pillar One

To provide context - with the advent of technology companies with an international reach and our increasingly globalised world, it became necessary to introduce tax measures that would ensure that the profit of these technology companies are appropriately taxed and that the countries in which their goods are sold, also receive their due. This is also referred to as base erosion. The issue is that the traditional international tax framework, which was based on principles such as tax residency and further regulated in double tax agreements between countries, did not adequately address this issue. Companies outside South Africa can therefore sell their goods in South Africa without having a physical presence here that would create a permanent establishment, thereby resulting in little to none of their profits derived from sales to South Africans being subject to tax in South Africa. The Budget explains that to address this issue, the Pillar One principles of the OECD/G20 Inclusive framework were proposed to establish a coherent and integrated approach to the tax treatment of multinationals, with the allocation of taxing rights among jurisdictions based on their market share. Although it was previously indicated that a position paper would be established on this, nothing has been forthcoming from National Treasury and the Budget indicates that no final agreement has been reached on Pillar One and OECD Guidelines for this Pillar have not been finalised and therefore the proposed legislative amendments mentioned in the 2022 Budget, seem to be on hold.

Pillar Two

In a nutshell, the Budget explains that this pillar focuses on the remaining base erosion and profit shifting matters to ensure that all internationally operating businesses with global annual revenue of more than EUR750 million pay an effective tax rate of at least 15%, regardless of where they are headquartered or which jurisdictions. The Budget further notes that a minimum effective tax rate for large multinationals is expected to apply in a number of countries from December 2023.

From a South African perspective, certain multinationals are subject to country-by-country (CbC) reporting obligations to SARS, but no formal legislation has been proposed in relation to Pillar One. The Budget states that government will publish a draft position on the implementation of Pillar Two for public comment and draft legislation will be prepared for inclusion in the 2024 Taxation Laws Amendment Bill. During the most recent Annexure C hearings, the question raised by National Treasury was whether South Africa should be a first mover, considering that many countries in the Global North have not yet implemented legislation to give effect to this pillar. The timing here seems to suggest that South Africa might have regard to what is done in other countries, which may then inform the 2024 proposals.

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