PODCAST | Jury out on global minimum tax

In this edition of Business Law Focus, host Evan Pickworth interviews Michael Hewson, founder and director of Graphene Economics, about the potential effects of the move towards a global minimum tax.

Since July 2021, 137 countries (accounting for more than 90% of the global economy) have signed a deal aimed at ensuring companies pay a global minimum tax rate of 15% and the Organisation for Economic Co-operation and Development (OECD), estimates this will generate $150bn in additional global tax revenues annually. However, the jury is out on exactly how much of this will find its way into the coffers of an emerging market such as SA. Could this be why only 23 African countries have signed the deal to date?

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The 15% global minimum tax was agreed in October 2021 as part of the two-pillar solution to address the tax challenges arising from digitalisation of the economy.

The Global Anti-Base Erosion Rules (Globe) are a key component of this plan and ensure large multinational enterprise pay a minimum level of tax on the income arising in each of the jurisdictions where they operate. More specifically, the Globe Rules provide for a co-ordinated system of taxation that imposes a top-up tax on profits arising in a jurisdiction whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum rate.

The OECD/G20 Inclusive Framework on base erosion and profit shifting (beps) has been developing an Implementation Framework to support tax authorities in the implementation and administration of the Globe Rules. As the first step in this process, the Inclusive Framework has undertaken public consultation to collect input from stakeholders on the matters they consider need to be addressed as part of the Implementation Framework.

Pillar 1 will apply to multinationals with global turnover above €20bn and with a profit margin above 10%, while pillar 2 will apply to those with global turnover above €750m.

The idea behind the new system is that it will benefit countries where a company’s products and services are sold and not only the countries where the products or services are provided from. This is a response to the trend towards companies migrating income from intangible sources (such as digital services or intellectual property royalties) to low tax jurisdictions to avoid paying a higher tax rate in their “home” countries.

While the proposed global minimum tax, which is now expected to be implemented in 2024, seems like a good idea for countries that have lost out on revenue collections from low tax arrangements, many developing countries (including SA and most African countries) are likely to have to give up any potential digital services taxes for limited potential benefit. This may explain why only 23 African countries have signed the deal to date.