Le Roux Roelofse | Director | International Tax, Tax Advisory and Transactions Leader | Deloitte South Africa | mail me |
Serushka Moodley | Assistant Manager | International Tax, Tax Advisory and Transactions | Deloitte South Africa | mail me |
The Multilateral Instrument (MLI), or to give it its full name, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), is a multilateral treaty (agreement) developed by the Organisation for Economic Co-operation and Development (OECD), with the support of the G20, to update the international tax rules through the implementation of a series of tax treaty measures without the need for countries to separately renegotiate each of their existing tax treaties.
The MLI is an outcome of the G20/OECD BEPS Project. The project was launched with a view to protecting the tax base of countries by making it more difficult for multinational enterprises to engage in tax avoidance strategies through shifting their profits to low tax jurisdictions.
Bilateral tax treaties
It was felt that the existing international tax rules needed to be strengthened to more effectively counter BEPS, and that the quickest way to do so without countries having to renegotiate their bilateral tax treaties individually would be for them to sign up to one agreement which would have the effect of simultaneously amending all their existing treaties.
The MLI was accordingly developed and has already been signed by more than 100 countries. Note that a country only becomes bound to apply the MLI to its tax treaties once it has signed the MLI, has deposited its reservations and notifications to the MLI with the OECD, and has ratified it.
Once ratified, the MLI comes into force and then applies to a double tax treaty if both countries to that tax treaty have ratified the MLI and have indicated that the treaty is covered by it.
Legally, the MLI is not an amending protocol to an existing double tax treaty, but must be read alongside that tax treaty to determine to what extent it modifies the treaty.
Impact on cross-border activities
South Africa already signed the MLI back in June 2017, but has only ratified it recently, on 30 September 2022, and notified the OECD of its ratification.
Accordingly, the MLI will come into force in South Africa on 1 January 2023. This means that in future, when doing a treaty analysis, one should always be attentive to whether the tax treaty under consideration is impacted by the MLI and, if it is impacted, to what extent the MLI modifies the treaty.
Taxpayers are therefore advised to familiarise themselves with the workings of the MLI in respect of their cross-border activities to the extent that these are within the purview of South Africa’s tax treaties.
For more information on South Africa’s list of reservations, and notifications upon deposit of the instrument of ratification, click here.
