Multinationals operating in Africa must prepare now for the 2023 15% minimum tax
Share this article:
By Dr Albertus Marais
The in principle multilateral agreement among 136 countries to move to a uniform global minimum tax of 15% by 2023 is significant for Africa and its investors.
For a start, the countries involved represent more than 90% of world GDP so this is a big deal for everyone trading and investing across borders. The other important takeaway is a uniform rate may help those companies which previously faced a slew of varying rates and approaches. In contrast, there will be many companies that enjoyed life under the old system but will now have to face far closer scrutiny. What is clear is companies will need to plan ahead, especially if the changes mean they may be faced with a higher tax bill.
Companies operating across borders will therefore need to determine possible credit risk thanks to higher marginal taxes, and the framework will necessitate changes to legal structures and the flow of capital investments.
According to Fitch, the agreement increases the chances of a multinational tax hike by 2023. This is because one of the problems this agreement tries to overcome is the practice by multinationals to blend income streams from high and low tax jurisdictions, to get a lower overall rate.
Despite a final agreement not yet being in place, many developed countries are already moving to increase tax rates.
What is significant is that the framework also proposes reallocating taxing rights from home countries to those countries where profits are earned – which is aimed at helping emerging markets, especially where digital taxes have not kept pace with change.
The OECD predicts $150 billion in extra global tax revenue will be collected as a result of these changes.
In a nutshell, the new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate updates key elements of the century-old international tax system. The aim is to stabilise the international tax system and ensure large multinationals pay a fairer share, which is why a minimum corporate tax rate of 15% has been proposed for large multinationals.
To refresh - Pillar One aims to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits, regardless of whether firms have a physical presence there.
Pillar Two seeks to put a floor on competition over corporate income tax, through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases.
The two-pillar package will provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure and the measures necessary to help optimise the strength and the quality of the post-Covid recovery.
Under Pillar One, taxing rights on more than $100 billion of profit are expected to be reallocated to market jurisdictions each year. The global minimum corporate income tax under Pillar Two - with a minimum rate of at least 15% - is estimated to generate around $150 billion in additional global tax revenues annually. Additional benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations.
Additional benefits will also arise from the stabilisation of the international tax system and the increased tax certainty for taxpayers and tax administrations.
What is clear is certain jurisdictions could become less favourable due to perceived unfair tax advantages provided by them no longer being available. Others can step up and take advantage.
An example where South Africa has recently made a step towards becoming more attractive, is the announcement that our corporate income tax rate is to be lowered from 28% to 27%, which is a corporate tax rate which is more competitive compared to the rest of the world.
Several so-called “tax havens” had become unpopular to trade with even prior to these changes, so the door is opening wider for companies and individuals to operate in jurisdictions they can trust.
However, entities will need to do a close analysis and audit of the risks and advantages of their current international tax structure. They will need to carefully assess their cross-border risks, and make appropriate changes to ensure they are compliant, but also benefit from a wider array of legitimate structuring options.
Dr Albertus Marais is the Director at AJM Tax