Member Article

On 7 June 2017, South Africa was one of more than 70 countries that signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“MLI”). The MLI is the result of certain of the Organisation for Economic Co-operation and Development’s action points aimed at preventing base erosion and profit shifting (“BEPS”). It is aimed at facilitating swift, coordinated and consistent implementation of treaty-related BEPS measures in a bilateral context. In particular, it is intended to function as a mechanism to facilitate agreement to changes to treaties without the need for time consuming bilateral renegotiation. The MLI applies to the signatories thereof that have taken the necessary steps to ratify it. Each party that has signed or will sign the MLI has provided or will provide a list of reservation and notifications, in terms of which it notifies:

· which agreements are covered by the MLI;

· which agreements contain provisions that are not subject to reservations under specific articles of the MLI; and

· it elects optional provisions/reservations.

Provided that South Africa and the other Contracting State are both parties to the MLI and have both deposited notifications that the agreement is covered by the MLI (“Covered Agreement”), the MLI may, depending on the reservations and notifications of each Contracting State, amended the existing provisions of the Covered Agreement. The MLI contains certain provisions that apply and cannot be opted out of, as well as certain optional provisions. The manner in which these optional provisions will apply is dictated by each country’s list of reservations and notifications. For example, article 7(8) of the MLI contains certain Simplified Limitation on Benefits (“SLB”) provisions. This means that if a party qualifies as a resident under a treaty but does not qualify as a “qualified person” under article 7(9) of the MLI, it is not entitled to certain benefits provided by the Covered Agreement, as determined in terms of the SLB provisions. Article 7(14) states that the SLB provisions shall apply in place of or in the absence of provisions of a Covered Agreement that would limit the benefits of the Covered Agreement. Although a party may reserve the right that the SLB provisions do not apply to a Covered Agreement that already contains such provisions, South Africa has not done so in respect of any of its treaties. As such, from South African perspective, the SLB provisions apply to Covered Agreements. The question is whether the MLI is relevant to South African pension funds that are exempt from South African income and capital gains tax.

The MLI is relevant to pension funds that invest offshore, as they may be exposed to foreign taxes and the double taxation agreements that South Africa has entered into may provide exemption or reduction from such foreign taxes. As such, the MLI may impact on the relief that a pension fund is entitled to claim in respect of existing treaties to which South Africa is a party. In particular, the SLB provisions will be very important to the pension fund. If the benefits of a pension fund are limited, it may suffer foreign taxes which it cannot set off against South African taxes. Provided that the pension fund qualifies as a resident of an existing treaty and such treaty constitutes a “Covered Agreement”, the pension fund will have to consider if it constitutes a “qualified person” in terms of the above in order to be entitled to the benefits of the agreement. Therefore, a pension fund should take advice whether it will constitute a “qualified person” for purposes of the MLI. It is noted that the MLI contains specific provisions as to when it will enter into force and these should only apply from a South African perspective once the MLI has been promulgated in the Government Gazette.

Magda Snyckers

tax director [email protected] cell: +27 83 289 3885