The impact of enacting Pillar Two Legislation in South Africa

The global minimum tax aims to limit the “race to the bottom” (in terms of which jurisdictions compete to attract investment by offering no or low tax rates) by setting a global minimum tax rate or floor (currently 15%) that large multinational enterprises (MNEs), i.e. enterprises with consolidated annual revenue generally exceeding €750 million, are required to pay in respect of income in every jurisdiction in which they operate. If a specific jurisdiction does not impose the minimum level of tax (e.g. Mauritius or the United Arab Emirates), the shortfall, known as top-up tax, will be paid in another jurisdiction (e.g. South Africa).

Top-up tax can be collected through two mechanisms. One mechanism collects top-up tax from an MNE’s domestic operations, while the other collects top-up tax from an MNE’s operations in no/low tax jurisdictions. 

In the 2024 Budget Speech, National Treasury estimated that the introduction of a global minimum tax in South Africa will result in additional tax revenue of R8 billion in 2026/27. This is a fraction of the R2.13 trillion estimated tax revenue collections for 2026/27. On that basis alone, the introduction of a global minimum tax will not significantly impact development goals in South Africa.

The reason global minimum tax is not expected to generate significant additional tax revenue, is partly because MNEs in South Africa are already expected to have relatively high effective tax rates (in excess of 15%), given our current statutory corporate tax rate of 27%. However, the actual effective tax rate for MNEs in South Africa could be less than 15% under certain circumstances because of factors such as tax incentives or concessions for specific industries – this warrants separate discussion.

Global minimum tax legislation was enacted in South Africa on 24 December 2024 and applies retrospectively to fiscal years commencing on or after 1 January 2024. The reason for the retrospective application is presumably to negate the possibility of South Africa losing out on top-up tax due in respect of an MNE’s domestic operations that would be collected by another jurisdiction in the absence of South African legislation.

Because global minimum tax is a global initiative that will ultimately result in top-up tax being paid somewhere (whether in the jurisdiction that the operations are based or elsewhere), and because global minimum tax is not expected to result in significant additional tax revenue in South Africa, its introduction is unlikely to deter foreign investment in South Africa.

However, the introduction of a global minimum tax does introduce significant additional complexity for MNEs that are already burdened by various other compliance obligations. The level of information required as well as the level of co-ordination required between taxpayers and tax authorities alike, is unprecedented and will require significant investment to build capabilities and capacity.

Finally, MNEs should be aware of the potentially significant penalties (up to R150 000 per month per entity within the MNE group) that could apply for non-compliance with global minimum tax legislation.