When reading this article, the reader is advised also to read three previous articles published on www.fincor.co.za for further clarity:
“The International Corporate Tax Problem – Base Erosion and Profit Shifting (BEPS)” dated 04 June 2020
“Addressing the Tax Challenge Arising from the Digitalisation of the Economy – OECD and International Tax Legislation” dated 03 August 2021
“Developing a Multilateral Instrument to Modify Bilateral Tax Treaties” dated 13 July 2023
Sources:
WWW.SARS.GOV.ZA
WWW. TREASURY.GOV.ZA
WWW/OCED.ORG/TAX/ and WWW.OECD/ORD/BEPS/
Gazette 47559 dated 25 November 2022
The Base Erosion Profit Shifting (BEPS) MLI has been published in Government Gazette 47559 on 25 November 2022. The BEPS MLI was approved and ratified by Parliament in terms of section 231(2) of the Constitution of the Republic of South Africa, 1996 (Act 108 of 1996), subject to notifications and reservations.
The overall goal of the BEPS MLI is to swiftly update the existing network of bilateral tax treaties to reduce opportunities for tax avoidance and base erosion by multinational enterprises. The BEPS MLI will be applied alongside existing tax treaties. South Africa currently has 79 bilateral tax treaties in force. In addition, a now-defunct bilateral tax treaty with the United Kingdom was extended to Granada and Sierra Leone. 76 of these tax treaty countries have been listed by South Africa in the notifications and/or reservations to be covered by the BEPS MLI. These 76 tax treaties will, after all these countries have ratified the BEPS MLI, meet the tax-related BEPS measures without the need to renegotiate these existing bilateral tax treaties.
Out of the above-mentioned 81 tax treaties, only five tax treaties will not be covered by the BEPS MLI, namely, Germany, Zambia, Malawi, Grenada, and Sierra Leone. South Africa did not include its tax treaties with Germany, Malawi, and Zambia in the list of the tax treaties that must be covered by the BEPS MLI because these tax treaties are currently under bilateral renegotiations and BEPS recommendations have been incorporated in the renegotiated agreements. South Africa did not include its tax treaties with Grenada and Sierra Leone as these tax treaties are incompatible with the provisions of BEPS MLI.
The BEPS MLI will come into force for the Republic of South Africa on 1 January 2023.
One example of a tax treaty in force is that of South Africa and Australia. “Synthesized texts” of the agreement have been published on the SARS website.
This document presents the synthesized text for the application of the Agreement between the Government of the Republic of South Africa and the Government of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to Taxes on Income signed on 1 July 1999, amended by the Protocol signed on 31 March 2008 (the “Agreement”), as modified by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting signed by the Republic of South Africa and by `Australia on 7 June 2017 (the “MLI”).
The document was prepared on the basis of the MLI position of the Republic of South Africa submitted to the Depositary upon ratification on 30 September 2022 and of the MLI position of Australia submitted to the Depositary upon ratification on 26 September 2018. These MLI positions are subject to modifications as provided in the MLI. Modifications made to MLI positions could modify the effects of the MLI on the Agreement.
The authentic legal texts of the Agreement and the MLI take precedence and remain the legal texts applicable.
The provisions of the MLI that are applicable with respect to the provisions of the Agreement are included in boxes throughout the text of this document in the context of the relevant provisions of the Agreement. The boxes containing the provisions of the MLI have generally been inserted in accordance with the ordering of the provisions of the OECD Model Tax Convention.
The provisions of the MLI applicable to the Agreement do not take effect on the same dates as the original provisions of the Agreement. Each of the provisions of the MLI could take effect on different dates, depending on the types of taxes involved (taxes withheld at source or other taxes levied) and on the choices made by the Republic of South Africa and Australia in their MLI positions.
Dates of the deposit of instruments of ratification, acceptance, or approval: 30 September 2022 for the Republic of South Africa and 26 September 2018 for Australia.
Entry into force of the MLI: 1 January 2023 for the Republic of South Africa and 1 January 2019 for Australia.
In accordance with paragraph 1 of Article 35 of the MLI, the provisions of the MLI (other than Article 16 Mutual Agreement Procedure) have effect with respect to this Agreement:
a) with respect to taxes withheld at source on amounts paid or credited to non-residents, where the event giving rise to such taxes occurs on or after 1 January 2023; and
b) with respect to all other taxes levied by that Contracting State, for taxes levied with respect to taxable periods beginning on or after 1 July 2023.
Taxes Covered
The existing taxes to which this Agreement shall apply are:
(a) in the case of Australia: the income tax, including the resource rent tax in respect of offshore projects relating to exploration for or exploitation of petroleum resources, imposed under the federal law of Australia;
(b) in the case of South Africa:
(i) the normal tax;
(ii) the secondary tax on companies; and
(iii) the withholding tax on royalties.
The Agreement shall apply also to any identical or substantially similar taxes, including taxes on dividends, that are imposed under the federal law of Australia or by the Government of the Republic of South Africa under its domestic law after the date of signature of the Agreement in addition to, or in place of, the existing taxes. The competent authorities of the Contracting States shall notify each other of any significant changes that have been made in the law of their respective States relating to the taxes to which the Agreement applies within a reasonable period of time after those changes.
For the purposes of Article 23A, the taxes to which the Agreement shall apply are taxes of every kind and description imposed on behalf of the Contracting States, or their political subdivisions or local authorities. Article 23A is titled “Non-discrimination” and refers to the taxation of permanent establishments and contracting states.
For the purposes of Articles 25 and 25A, the taxes to which the Agreement shall apply are:
(a) in the case of Australia, taxes of every kind and description imposed under the federal tax laws administered by the Commissioner of Taxation; and
(b) in the case of South Africa, taxes of every kind and description imposed under the tax laws administered by the Commissioner for the South African Revenue Service.
Articles 25 and 25A are titled “Exchange of Information” and “Assistance in the Collection of Taxes” respectively.
The term “Australia”, when used in a geographical sense, excludes all external territories other than:
(i) the Territory of Norfolk Island;
(ii) the Territory of Christmas Island;
(iii) the Territory of Cocos (Keeling) Islands;
(iv) the Territory of Ashmore and Cartier Islands;
(v) the Territory of Heard Island and McDonald Islands; and
(vi) the Coral Sea Islands Territory,
and includes any area adjacent to the territorial limits of Australia (including the Territories specified in this subparagraph) in respect of which there is for the time being in force, consistently with international law, a law of Australia dealing with the exploration for or exploitation of any of the natural resources of the seabed and subsoil of the continental shelf;
The term “South Africa” means the Republic of South Africa and, when used in a geographical sense, includes its territorial sea as well as any area outside the territorial sea, including the continental shelf, which has been or may hereafter be designated, under the laws of South Africa and in accordance with international law, as an area within which South Africa may exercise sovereign rights or jurisdiction.
This multi-lateral agreement continues indefinitely, but either the Government of Australia or the Government of the Republic of South Africa may, on or before 30 June in any calendar year beginning after the expiration of 5 years from the date of its entry into force, give to the other Government through the diplomatic channel written notice of termination and, in that event, the Agreement will cease to be effective:
(a) in the case of Australia:
(i) with regard to withholding tax on income that is derived by a non-resident, in respect of income derived on or after 1 January next following the date on which the notice of termination is given;
(ii) with regard to other Australian tax, in respect of income, profits or gains of any year of income beginning on or after 1 July in the calendar year next following the date on which the notice of termination is given;
(b) in the case of South Africa:
(i) with regard to taxes withheld at source, in respect of amounts paid or credited after the end of the calendar year in which the notice of termination is given;
(ii) with regard to other South African tax, in respect of years of assessment beginning after the end of the calendar year in which the notice of termination is given.
In closing, the BEPS MLI allows jurisdictions to swiftly implement measures to strengthen existing tax treaties to protect governments against tax avoidance strategies that inappropriately use tax treaties to artificially shift profits to low or no-tax locations. The measures to be implemented put an end to treaty abuse and “treaty shopping” by transposing in existing tax treaties jurisdictions’ commitment to minimally include in their tax treaties tools to ensure these treaties are used in accordance with their intended object and purpose.
The BEPS MLI further enhances treaty-related dispute resolution mechanisms. In addition, over 30 jurisdictions decided to introduce, via the BEPS MLI, an arbitration procedure in their tax treaties, which further improves tax certainty.