South Africa Ratifies the Multilateral Instrument

On 30 September 2022, South Africa deposited its instrument of ratification of the Multilateral Instrument which will therefore enter into force for South Africa on 1 January 2023. This will have far-reaching implications for South Africa’s bilateral tax treaties with other jurisdictions that have already, or will in future, also ratify the MLI, which includes the majority of our main trading partners. The MLI is one of the outcomes of the OECD/G20 Project to tackle Base Erosion and Profit Shifting (‘BEPS’) - tax planning strategies to exploit gaps and mismatches in tax rules that seek to shift profits to low-tax jurisdictions.


As outlined in the OECD’s Explanatory Statement to the MLI, the BEPS Action Plan was developed by the OECD and was endorsed by the G20 Leaders in September 2013. It identified 15 actions to tackle BEPS in a comprehensive manner and set out deadlines to implement those actions. Action 15 of the BEPS Action Plan provided for the possible development of a multilateral instrument to implement tax treaty-related BEPS measures to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties.

After two years the OECD produced the final BEPS Package, which was endorsed by the OECD Council and the G20 Leaders in November 2015. It was agreed that certain of the BEPS measures are minimum standards, meaning that the participating countries agreed that the particular standard must be implemented. The implementation of the Final BEPS Package will require changes to model tax conventions, as well as to the bilateral tax treaties based on the model conventions. Because there are more than 3 000 bilateral treaties in existence, in the absence of a method for swift implementation of the changes, negotiating changes to the treaties would be burdensome and time-consuming. The idea is therefore that if BEPS-related changes to multiple bilateral tax treaties are sought to be implemented, such implementation can be achieved by making amendments to the MLI, provided that the MLI has entered into force in the jurisdictions to which each bilateral treaty relates.

The Action 15 Report entitled “Developing a Multilateral Instrument to Modify Bilateral Tax Treaties” concluded that a multilateral instrument, providing an innovative approach to enable countries to swiftly modify their bilateral tax treaties to implement measures developed in the course of the work on BEPS, was desirable and feasible. An ad hoc Working Group was formed and endorsed by the G20 Finance Ministers and Central Bank Governors in February 2015. The ad hoc Group was open to all interested countries participating on an equal footing and 99 countries participated in the ad hoc Group as members, together with four non-State jurisdictions and seven international or regional organisations that participated as observers.

The MLI is the result of the work of the ad hoc Group and it entered into force for the first time on 1 July 2018. It presently covers 100 jurisdictions. Each jurisdiction was free to effectively choose its own date on which the MLI entered into force and thereby, when it entered into effect. For example, the MLI entered into effect in the UK on 1 January 2019 and in Germany on 1 January 2022. The USA is not a signatory to the MLI. The only African countries besides South Africa that are currently signatories to the MLI are Egypt and Mauritius (entry into effect 1 January 2021), Burkina Faso (entry into effect 1 January 2022), Cameroon, Lesotho, Senegal and Seychelles (entry into effect 1 January 2023).

Implementation Approach

The MLI modifies tax treaties between two or more Parties to the Convention. It is in effect applied ‘alongside’ existing tax treaties, modifying their application to implement the BEPS measures. To determine whether the MLI applies to a bilateral tax treaty, one must first determine whether the MLI has entered into force in both jurisdictions. The MLI enters into force on the first day following three calendar months after a jurisdiction finalised its ratification process. In the case of South Africa, the MLI will come into force on 1 January 2023. If the MLI has entered into force for both jurisdictions, one should next determine whether both jurisdictions have notified the OECD that they wish to modify the specific bilateral treaty with regard to the MLI; in other words, whether the treaty is a ‘Covered Tax Agreement’ as defined in the MLI. The extent to which the MLI will modify a Covered Tax Agreement with respect to a particular article in the bilateral treaty also depends on whether the relevant provision of the MLI has entered into effect for both jurisdictions and on the choices made by the respective jurisdictions from the various options that the MLI makes available. Broadly, the MLI makes the following choices available:

  • Choices amongst alternatives  in certain of the provisions of the MLI;
  • Choices whether or not to apply optional provisions; and
  • Choices to opt out through reservation with respect to all of their Covered Tax Agreements or certain Covered Tax Agreements.

However, jurisdictions may not choose to opt out of provisions of the MLI that are a BEPS minimum standard.

Assuming that a particular provision of the MLI has entered into effect for both Parties to a Covered Tax Agreement, to determine whether the provision applies to a Covered Tax Agreement, one therefore has to consider the choices made by both jurisdictions in relation to the provision and whether these choices result in a match or a mismatch. The consequences of a mismatch vary depending on the provision in question. In many cases, a mismatch results in the provision of the MLI not applying to the Covered Tax Agreement.

As mentioned above, once the MLI has entered into force in relation to a jurisdiction, one must determine the date on which its provisions enter into effect. A provision of the MLI may only apply to a Covered Tax Agreement if that provision has entered into effect for both Parties to a Covered Tax Agreement. The provisions (other than those relating to mutual agreement procedures) enter into effect as follows:

1.         Withholding taxes: on the first day of the first calendar year following the entry into force – for South Africa this is for events that give rise to the withholding tax occurring from 1 January 2023 onwards; and

2.         Other taxes: for taxable periods beginning on or after six calendar months after the entry into force date – for South Africa this is for taxable periods commencing from 1 July 2023 onwards.

Impact of the MLI

The following is a brief summary of some of the more important MLI provisions. Multinationals will need to carefully consider the treaty positions adopted by each of the jurisdictions in which they operate, with respect to each relevant bilateral treaty. In most cases, the MLI provisions are subject to one or more of the choices described above, except where the provision is a BEPS minimum standard:

  • Article 3 Transparent entities: Income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the law of either contracting jurisdiction shall be considered to be the income of a resident of a contracting jurisdiction, but only to the extent that the income is treated, for tax purposes by that contracting jurisdiction, as the income of a resident of that contracting jurisdiction.
  • Article 4 Dual resident entities: The competent authorities of a dual resident entity shall endeavour to determine by mutual agreement the jurisdiction of which the entity shall be deemed to be a resident for purposes of the relevant bilateral tax treaty. In making this determination, the competent authorities are required to take into account the place of effective management, place of incorporation and any other relevant factors. In principle, treaty benefits will be denied in the absence of such agreement except to the extent and in such manner as may be agreed upon by the competent authorities.
  • Article 7 Prevention of treaty abuse: Jurisdictions may choose between the principal purpose test on its own or the principal purpose test in combination with the simplified limitation on benefits rule. Parties that prefer to address treaty abuse by adopting a detailed limitation on benefits rule are permitted to opt out of the principal purpose test and agree to endeavour to reach a bilateral agreement that satisfies the minimum standard.

South Africa has chosen the principal purpose test. This means that a benefit under the bilateral tax treaty will not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in the circumstances would be in accordance with the object and purpose of the relevant provisions of the bilateral tax treaty.

It is unclear at this stage how courts would interpret the phrase ‘one of the principal purposes’ as applied to practical situations in this context.

  • Article 8 Dividend transfer transactions: Provisions of a bilateral tax treaty that exempt or limit the rate of dividend withholding taxes paid by a company that is a resident of a contracting jurisdiction, provided that the beneficial owner or the recipient is a company which is a resident of the other contracting jurisdiction that owns, holds or controls more than a certain amount of the capital, voting rights or similar interests of the company paying the dividends, shall only apply if the ownership conditions are met throughout a 365-day period that includes the day of the payment of the dividends. For purposes of computing this holding period, no account shall be taken of changes of ownership resulting from corporate reorganisations such as mergers or divisive reorganisations.
  • Article 9 Capital gains from alienation of shares deriving value principally from immovable property-  South Africa has chosen the alternative whereby gains derived by a resident of a Contracting Jurisdiction from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting Jurisdiction if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting Jurisdiction.
  • Article 13 Artificial avoidance of permanent establishments through specific activity exemptions: A permanent establishment shall be deemed not to include activities specifically listed in the bilateral tax treaty, the maintenance of a fixed place of business solely for the purpose of carrying on any activity for the enterprise, or a combination of these activities, if such specific activity or the combination of these activities of the fixed place of business is of a preparatory or auxiliary character. In addition, an anti-fragmentation rule applies for activities carried out by the same enterprise or closely related enterprises in the same jurisdiction.
  • Article 16 Mutual agreement procedure: If a person considers that the actions of one or both of the contracting jurisdictions will result in taxation not in accordance with the provisions of the bilateral tax treaty, the taxpayer may present the case to either of the competent authorities. The case must be presented within three years as of the first notification of the action resulting in taxation not in accordance with the provisions of the bilateral tax treaty.

South Africa has chosen to opt out of the above wording on the basis that it intends to implement element 1.1 of the BEPS Action 14 (‘making dispute resolution mechanisms more effective’) minimum standard through administrative measures.

  • Article 19 Mandatory binding arbitration: Provides mandatory binding arbitration, upon request by the applicant, in case jurisdictions are unable to reach an agreement to resolve the dispute using the mutual agreement procedure.


The entry into force of the MLI on 1 January 2023 will herald a new era for South Africa in which international tax involving South Africa as a jurisdiction, including international tax planning, will become considerably more complex. Taxpayers will have to take account of the other jurisdiction’s positions as well as those of South Africa in deciding whether the MLI should be applied to the relevant treaty and, if so, how it should be applied. In particular, the potential application of Articles 4, 7, 8 and 13 of the MLI will need to be carefully considered. It is also likely that changes will be made to the MLI over time, the effects of which will also have to be carefully monitored.

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