South Africa ratifies MLI and develops synthesised DTAs
M&A tax
South Africa ratifies MLI and develops synthesised DTAs
Tue 09 May 2023
Adopting the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) has been an important development in the international tax landscape, having far-reaching effects on the double tax agreements entered into between countries. Even though not obliged to do so, South Africa opted to develop synthesised texts to the MLI to their respective Double Tax Agreements (DTAs). This is an essential step to ensure that application of the MLI is accurate.
On 30 September 2022, South Africa deposited its instrument of ratification in respect of the MLI with the Organisation for Economic Co-operation and Development (OECD). In terms of Article 34, the MLI enters into force on the first day following three calendar months after a jurisdiction finalises its ratification process. Consequently, the MLI entered into force for South Africa on 1 January 2023.
Even though South Africa has ratified the MLI, it will still only apply if the MLI has entered into force in both jurisdictions to which the DTA applies. The extent to which the MLI will modify a DTA will depend on the choices made by the various jurisdictions.
The MLI does not amend the text of a specific DTA but instead operates alongside it with the aim of modifying its application. On that basis, the South African Revenue Authority has gone ahead with the development of synthesised texts to the MLI to their respective DTAs. South Africa is not obligated to do so under the MLI; however, this is an important step to ensure that application of the MLI is accurate. The synthesised texts for each DTA are drafted in consultation with the relevant treaty partners but are non-binding.
These texts, which are essentially consolidated versions of the DTAs, as modified by the MLI, are aimed at facilitating the understanding of the application of the MLI to a particular tax treaty. However, it should be noted that a synthesised text does not constitute a source of law. The authentic legal texts of the tax treaty and the MLI take precedence and remain the legal texts applicable.
While the MLI entered into force in South Africa on 1 January 2023, not all provisions are effective from that date. Essentially, withholding taxes would apply to transactions on or after 1 January 2023, which is the first day of the first calendar year following the entry into force. For any other taxes, the MLI applies to taxable periods commencing on or after 1 July 2023, which is six calendar months after the entry into force date.
The synthesised text represents the following in a single document:
- The DTA text that is modified by the MLI, including the text of amending protocols where relevant.
- The provisions of the MLI that affect the tax treaty as a result of the interaction of the MLI positions of the jurisdictions, and
- The dates on which the provisions of the MLI take effect for the specific DTA.
The South African Revenue Authority has provided an easily understandable table that will be updated on an ongoing basis once a treaty partner has signed the MLI, deposited its Instrument of Ratification, and consultations have been concluded on the synthesised text.
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