On 30 September 2022, South Africa deposited its instrument of ratification in respect of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”) with the Organisation for Economic Development and Cooperation (“OECD”).
South Africa became a signatory to the MLI on 7 June 2017. The MLI does not function in the same way as an amending protocol to a bilateral double tax agreement (“DTA”) which directly amends the text of the specific DTA. Instead, the MLI will apply alongside existing DTAs and it modifies their application in order to implement the OECD's Base Erosion Profit Shifting measures.
These measures include significant amendments to South Africa's double tax agreements which will be impacted by the MLI. These include the implementation of the minimum standards relating to the prevention of treaty abuse and the improvement of dispute resolution.
Perhaps the most significant amendment will be in relation to the benefits of a double tax agreement not being granted in circumstances where obtaining such benefit was one of the principal purposes of any arrangement or transaction. Therefore, in terms of this so-called “principal purpose test” if one of the principal purposes of a transaction was in order to obtain a benefit under a DTA, once the MLI comes into effect, such benefit will no longer be available to the relevant taxpayer. This will apply to transactions entered into before the ratification of the MLI.
In accordance with Article 34(2) of the MLI, the MLI will enter into force in South Africa on the first day of the month following the expiration of a period of three calendar months beginning on the date of the deposit by South Africa of its instrument of ratification. Since South Africa deposited its instrument of ratification on 30 September 2022, the MLI will enter into force in South Africa on 1 January 2023.
Generally speaking, in respect of a specific covered tax agreement, the provisions of the MLI apply as follows in terms of Article 35(1) of the MLI:
- with respect to taxes withheld at source, the MLI will have effect from the first day of the next calendar year that begins on or after the latest of the dates on which the MLI enters into force for the contracting jurisdictions to a specific covered tax agreement;
- with respect to all other taxes, the MLI will apply with respect to taxable periods (years of assessment) beginning on or after the expiration of a period of six calendar months (or a shorter period if the contracting jurisdictions agree) from the latest of the dates on which the MLI enters into force in respect of the specific covered tax agreement.
This may be illustrated by using the DTA between South Africa and the UK as an example, since the MLI entered into force in the UK on 1 October 2018 and the SA/UK DTA has been listed by both South Africa and the UK as a covered tax agreement (in the case of South Africa, in terms of its provisional list of covered tax agreements).
Since the MLI entered into force in the UK on 1 October 2018, the latest of the dates on which the MLI enters into force for the contracting jurisdictions (South Africa and the UK) to the SA/UK DTA will be 1 January 2023 (the date on which the MLI will enter into force in South Africa). The MLI would then apply in respect of taxes withheld at source in the context of the SA/UK DTA from 1 January 2023.
With respect to all other taxes, the MLI would apply with respect to taxable periods (years of assessment) beginning on or after the expiration of a period of six calendar months (or a shorter period if the contracting jurisdictions agree) from the latest of the dates on which the MLI enters into force in respect of the specific covered tax agreement. Using the SA/UK DTA again as an example, the MLI would then generally apply in the context of the SA/UK DTA to years of assessment starting on or after 1 July 2023 (assuming South Africa and the UK do not agree to a shorter period as mentioned above).
It is therefore clear that clients need to consider their position to determine the potential impact of the MLI and its timing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.