• Market Watch

A shift in tax policy

• 1 Day Ago - 2025-09-08 00:00:00

As the international tax landscape undergoes its most significant transformation in decades, countries around the world are preparing to adapt to new rules aimed at curbing aggressive
tax planning and profit shifting by multinational enterprises (MNEs). Central to this global reform is Pillar Two of the Organisation for Economic Co-operation and Development
(OECD/G20) Inclusive Framework on Base Erosion and Profit Shifting (BEPS) which introduces a global minimum corporate tax rate of 15%. While the reform is driven by global
consensus, its implications for developing economies like Namibia and for Africa at large are profound especially in light of Namibia’s emerging energy sector including major green
hydrogen projects and significant offshore oil and gas discoveries.

Pillar Two is designed to ensure that large MNEs being those with annual global revenues exceeding €750 million pay a minimum level of tax regardless of where their profits are
booked. Under the current system, many multinationals legally shift profits to low-tax jurisdictions often leaving developing countries where real economic activity occurs with
limited taxing rights. Pillar Two seeks to address this by implementing a series of interconnected rules: the Income Inclusion Rule (IIR) which imposes a top-up tax at the
parent level if income is taxed below the minimum rate; the Undertaxed Payments Rule (UTPR) which denies deductions for payments made to low-taxed group entities and most
critically for source countries like Namibia the Subject to Tax Rule (STTR) which allows a withholding tax of up to 9% on certain cross-border payments such as interest, royalties and
service fees.

Globally over 140 jurisdictions have endorsed the Pillar Two framework, with many including members of the European Union, the United Kingdom, Japan, South Africa and South Korea
already enacting legislation or preparing for implementation in the current year 2025. The United States, while influential in the framework’s development, has yet to fully align its
domestic laws with the Pillar Two provisions due to legislative gridlock. Nonetheless the shift toward a standardised global minimum tax regime is already underway, with far-reaching
consequences for how governments raise corporate tax revenues in a digitised and globalised economy.

In the African context Pillar Two presents both an opportunity and a challenge. Many African economies are heavily reliant on corporate income taxes from multinationals operating in
sectors such as mining, energy, telecommunications and banking. These sectors often involve cross-border transactions that can be structured to minimise tax liabilities in African
jurisdictions. With Pillar Two, African countries now have a chance to secure a more equitable share of global tax revenues, particularly through the STTR which empowers
source countries to claim taxing rights on outbound payments. However, implementation capacity remains a major hurdle. Complex rulemaking, data collection and administrative
enforcement require resources that many African tax administrations currently lack and without targeted technical support and regional coordination, there is a risk that African
countries could remain on the periphery of the benefits while top-up taxes are collected in developed countries where the MNE headquarters are located.

Namibia’s position within this evolving global tax framework is increasingly significant, especially considering the recent momentum in the oil and gas sector, with multiple high-
profile offshore discoveries by international players. These developments are expected to attract billions in foreign investment and long-term infrastructure commitments. At the same
time, the country is at the forefront of the green transition in Africa, with bold ambitions to become a green hydrogen hub through projects like the Hyphen Hydrogen Energy initiative
in the Tsau //Khaeb National Park. These large-scale energy ventures many backed by multinational consortia are exactly the type of operations that could fall within the scope of
Pillar Two.

While Namibia’s statutory corporate tax rate of 32% for non-mining companies and up to 37.5% for mining remains well above the global minimum, the effective tax rates (ETRs) for
certain projects may fall below 15% due to generous tax holidays, investment incentives or negotiated fiscal terms particularly in the case of strategic greenfield investments in green
hydrogen or petroleum. Under Pillar Two, if an MNE’s effective tax rate in Namibia falls below the 15% threshold, the top-up tax may be paid elsewhere typically in the MNE’s
ultimate parent’s home jurisdiction meaning Namibia could miss out on revenue from economic activity taking place on its own soil.

To avoid this, Namibia must carefully assess how its investment incentive policies which have traditionally served as tools to attract capital into high-risk sectors interact with the new
global tax rules. This is particularly pressing for the energy and natural resource sectors, where upfront capital expenditure is high and profit realisation can take years. Failure to
modernize these frameworks could undermine the country’s ability to capture the full fiscal benefit of its new energy wealth. Implementing the Subject to Tax Rule (STTR) would be a practical and powerful step in safeguarding Namibia’s taxing rights on outbound payments, such as interest, management fees and royalties paid to low-tax affiliates abroad. This could be especially relevant for project structures in the oil and gas or green hydrogen space, where financing and IP arrangements often span multiple jurisdictions. Additionally, contract negotiations with
foreign investors should begin to reflect the implications of Pillar Two ensuring that Namibia retains adequate taxing rights under the new global standard.
*Prime Shaapopi a chartered accountant with interest in taxation. He writes in his own capacity.**