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South Africa: Multilateral instrument – instrument of ratification deposited

14 October 2022
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On 30 September 2022, South Africa finally deposited its instrument of ratification in respect of the multilateral instrument (MLI) to modify bilateral tax treaties concluded between South Africa and its covered tax agreements (i.e. tax treaties that South Africa has confirmed will be impacted by the MLI).

The MLI, which is more formally known as the Multilateral Convention, is being used by over 100 countries to efficiently amend their tax treaty networks to implement tax treaty related measures that are aimed at the prevention of base erosion and profit shifting (BEPS). The MLI first came into force in 2018, and many countries were early adopters, but South Africa has been slow to pull the trigger.

The MLI formed part of the Organisation for Economic Co-operation and Development’s (OECD) BEPS initiative. Specifically, Action 15 dealt with the need for the MLI, which in essence is aimed at combating abuse in the context of tax treaties.

The most notable measures include amendments to limit the availability of the permanent establishment exemption rule where activities are considered to be of a ‘preparatory or auxiliary’ nature and the adoption of the Principal Purpose Test that will deny treaty benefits where one of the principal purposes of an arrangement is to directly or indirectly obtain the benefit of the tax treaty.

The MLI does not function in the same way as an amending protocol to a bilateral tax treaty, where such a protocol would directly amend the text of the specific treaty. Instead, the MLI applies alongside existing treaties and modifies their application in order to implement the BEPS measures. However, in most cases the amendments will only have the effect of amending the tax treaty where both treaty partners have elected for the same amendments to apply.

South Africa has included 76 of its existing tax treaties as covered tax agreements under the MLI (i.e. tax treaties that may be amended by the MLI). However, certain jurisdictions such as Botswana, Brazil, Ghana, Mozambique, Tanzania, Uganda and the USA, have not signed the MLI, and therefore, despite being included on South Africa’s list, will not constitute covered tax agreements. 

Further, South Africa did not include Germany, Grenada, Malawi, Sierra Leone and Zambia in the list of covered tax agreements. Germany, Malawi and Zambia are not included in the list as these tax treaties are currently being renegotiated and BEPS recommendation have been incorporated in the renegotiated agreements. Grenada and Sierra Leone are not included in the list as these tax treaties are incompatible with the provisions of the BEPS MLI.

In order for the provisions of the MLI to take effect with respect to a specific covered tax agreement, not only must the parties both have selected the same amendments, it is also necessary that both parties to the covered tax agreement have deposited their instrument of ratification with the OECD and the relevant time period (being a period of three calendar months) has passed in order for the MLI to enter into effect. 

Thus, while the MLI will enter into force in respect of South Africa on 1 January 2023, its entry into force for South Africa’s covered tax agreements will depend on the ratification of the MLI by the counterparty to a particular covered tax agreement. With that in mind, it is therefore necessary to analyse each covered tax agreement to check which of the alternatives or optional provisions, as per the text of the MLI, have been chosen by the respective jurisdictions. South Africa’s instrument of ratification for the MLI is available here.