On 5 June 2021, the G7 Nations comprising of the United States, United Kingdom, France, Germany, Canada, Italy, and Japan reached an agreement on global tax reforms. For many years multinational companies (“MNCs”) have been setting up branches in countries with low corporate tax rates and declaring profits in those countries thus reducing the amount of tax they pay. The G7 agreement looks to end this practice by making MNCs pay more tax in the country where they sell their products and services rather than in the country where they declare their profits.
The reforms are set out in two Pillars of the agreement. Pillar 1 applies to MNCs with at least a 10% profit margin and provides for 20% of any profit above that margin to be reallocated and taxed in the countries where they operate. Pillar 2 of the agreement states that a global minimum corporate tax rate of at least 15% should be implemented to avoid countries undercutting each other. In other words, it seeks to remove the incentive for MNCs to shift profits to low tax jurisdictions.
In South Africa, the corporate tax rate is currently 28%, and it is expected to be lowered to 27% on 1 April 2022. South Africa is therefore not a low tax jurisdiction and MNCs that operate in South Africa will not be negatively affected by this agreement in respect of their South African profits. Whether the South African fiscus benefits from this agreement will only really be evident in the years to come when it becomes clearer whether countries that are part of G20 and the OECD support the agreement.
MNCs that operate in low tax jurisdictions such as Singapore (17%), Mauritius (15%), Cyprus (12.5%), Ireland (12.5%), and the many “tax havens” where no or little corporate tax is payable, are likely to be affected. If the minimum tax rate of 15% becomes widely accepted, it disincentivises MNCs to declare profits in tax havens.
The G7 Agreement is just the first step in global tax reform and its success will be dependent on broader support from OECD and G20 countries, and in particular China. Commenting on the agreement, Gabriel Zucman an economist at the University of California, Berkley said that the agreement was, “historic, inadequate and promising”, because while the 15% was too low, there was no obstacle to reaching a higher rate.