Double Tax Agreements can now be amended more easily

2018/19 South African National Budget Expectations

Tax treaties play a critical role in facilitating trade as they make the tax environment predictable and ensure tax certainty. However, the process involved in negotiating and concluding double tax agreements (DTAs) is often long and time consuming. Once concluded, re-negotiating and amending tax treaties can take months, sometimes even years. This is undesirable. What is required is a swift and flexible process capable of speedily responding to the ever-evolving economic environment and thus ensuring that tax treaties continue to be in line with these changes.

In June 2017, around 68 countries signed the Multilateral Convention to Implement Tax Treaty-related Measures to Prevent Base Erosion and Profit Shifting (MLI). 

This convention aims to swiftly implement the tax treaty-related measures arising from the G20/OECD Base Erosion and Profit Shifting (BEPS) project. BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax jurisdictions where there is little or no economic activities, resulting in little or no overall corporate tax being paid. Instead of countries following the traditional approach of re-negotiating tax treaties in order to introduce amendments relating to BEPS, the OECD has proposed that this should be achieved through the conclusion of the MLI. In my view, this marks a turning point in tax treaty history because it significantly shortens the period to amend tax treaties and thus, save countries from the burden of bilaterally re-negotiating these treaties. 

To this end, the MLI does not function in the same way as an amending protocol to an existing tax treaty, which actually amends the treaty text itself. Instead, the MLI is applied alongside the existing treaty, with the effect that the application of the treaty is then modified without changing the underlying text. A treaty can only be modified through the MLI if both parties agree to the amendments. To achieve this, both signatories to a tax treaty are required to ratify the MLI in accordance with their domestic constitutional framework.

Whilst only 68 countries attended the signing ceremony in June 2017, the MLI remains open to any country interested in joining. It is expected that thousands and thousands of tax treaties will be amended through the MLI.

It is disappointing however to see that African countries have so far lacked interest in the MLI. Fewer than 10 African countries, including South Africa, have signed the MLI since June 2017. This does not augur well for the continent as the MLI presents a perfect opportunity to amend old tax treaties, which most African countries have concluded. 

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