You’ve found the double tax agreement, read the dividend article, done the sums and built the structure around a nice low withholding rate. Unfortunately, the treaty you read may not be the treaty that applies. Since 2018, many of the world’s tax treaties have been quietly rewritten without anyone changing the PDF on the revenue authority’s website. The thing that rewrote them is called the MLI, and it may be the most consequential tax document most people have never heard of.
What is it?
MLI stands for the Multilateral Instrument, or less snappily, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. Nobody calls it that twice.
In 2015 the OECD and G20 agreed a package of measures against multinationals shifting profits to low-tax countries, known as BEPS. Several of those measures needed changes to tax treaties. The problem was that there are thousands of bilateral treaties, and renegotiating them one pair of countries at a time would have taken longer than most tax careers.
The countries agreed a single convention instead, concluded in Paris on 24 November 2016. A country that signs and ratifies it lists the treaties it wants changed, and the MLI then modifies all of them at once. About 100 jurisdictions have signed. The United States is the notable absentee.
How does it work?
This is the clever part, and also the part that makes it hard to read.
The MLI doesn’t replace a treaty. It sits alongside it and changes how it is read. And it only changes a treaty where both countries agree:
- Both countries must list the treaty. If either leaves it off its list, the MLI does not touch that treaty at all.
- Some changes are compulsory. The minimum standards, a new preamble, an anti-abuse rule and improvements to dispute resolution, apply to every listed treaty, although a country can meet the anti-abuse standard in more than one way.
- Everything else is a menu. Each country chooses which optional articles to apply and can reserve against the rest. An optional change only applies to a treaty where both countries made a matching choice.
The result is that two countries can both have signed the MLI and their treaty can still be unchanged on a particular point, because one of them said no.
The timing has its own set of rules too, just to make it harder to figure out what’s going on. Under Article 35, a change generally applies to withholding taxes from 1 January of the year after the MLI is in force for both countries, and to other taxes for tax periods beginning six months after that. South Africa’s MLI came into force on 1 January 2023, so its changes generally apply to its withholding taxes from 1 January 2023 and to other taxes for periods beginning on or after 1 July 2023, provided the other country was already on board.
What does it actually change?
The changes that matter most to our clients are these.
A new preamble. Treaties now say they are intended to eliminate double taxation “without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance”, including treaty shopping. That sounds like decoration. It isn’t. Courts and revenue authorities read a treaty in the light of its purpose, and the purpose has changed.
The principal purpose test. This is the big one. Under Article 7, a treaty benefit is denied if it is reasonable to conclude, having regard to all the facts, that obtaining it was one of the principal purposes of any arrangement or transaction, unless granting it is in line with the object and purpose of the treaty provision. Not the only purpose, not the main purpose: one of the principal purposes. We explained how it works in Treaty Shopping for Normal People.
Optional changes, where both countries chose them. These include:
- a minimum 365-day holding period before a company qualifies for a reduced dividend withholding rate (Article 8), this can be a very big deal and is often forgotten
- a 365-day look-back for property-rich share sales (Article 9)
- new rules for companies that are tax resident in two countries (Article 4)
- wider definitions of a permanent establishment (Articles 12 to 15).
What it looks like in practice
Three treaties our clients use often show how it plays out.
South Africa and Mauritius. Both countries listed the treaty, so the new preamble and the principal purpose test apply. Mauritius reserved against Article 8 entirely, so there is no 365-day holding period attached to the 5% dividend rate. Both countries reserved against the main property-rich rule in Article 9(1), so that doesn’t change either.
South Africa and the UAE. The synthesised text shows the preamble, the principal purpose test and the corresponding adjustments article boxed into the treaty. The capital gains article has no MLI box at all, so the treaty still has no property-rich clause. For a UAE company selling shares in a South African property company, that is the difference between South Africa having a treaty right to tax the gain and not having one.
Mauritius generally. Mauritius has reserved against most of the optional articles, including the dual resident entity rule, the new permanent establishment rules and the property-rich rule. Its treaties have changed mainly through the minimum standards. That’s still a big change, because the principal purpose test is one of them.
The answer to “has the MLI changed my treaty?” comes from three things: the two countries in play, the specific article that has changed and the effective date.
Why it must be considered
The original PDF treaty is no longer the treaty. Any treaty claim, withholding tax form, structure review or tax opinion that relies only on the original treaty text may be relying on wording that no longer applies.
Existing structures are not protected. There is no grandfathering. A holding company set up in 2012 is tested under the principal purpose test on dividends it receives today. If the reasons for the structure were never written down, now is a good time to do it, while the people who made the decision still remember why.
The synthesised texts help, but they are not the law. Revenue authorities publish synthesised texts that show the treaty and the MLI changes together. They are very useful, and we use them all the time, but they carry a disclaimer: the authentic legal texts are the treaty and the MLI themselves, and the countries’ MLI positions can change. They also aren’t available for every treaty.
The dates matter. A transaction that took place before the MLI took effect for a particular treaty is read under the old text. A dividend paid a month later may not be.
FAQs
1. Has my treaty been changed by the MLI?
Only if both countries signed and ratified the MLI and both listed that treaty. Even then, only the minimum standards and the optional articles both countries chose apply. The synthesised text, where there is one, is the quickest way to find out.
2. Does the MLI create new taxes?
No. It can only restrict or remove treaty relief or change how the treaty is read. The tax itself still has to come from a country’s own law.
3. Our structure has worked for years. Does the MLI really affect it?
It may. The principal purpose test applies to benefits claimed after it takes effect, regardless of when the structure was set up.
4. Can I rely on the synthesised text?
It’s the best starting point, but not the final word. Where a lot of money depends on it, check the treaty, the MLI and both countries’ positions and check them carefully.
Contact us to discuss this in more detail.
About the author
Caoilfhionn (pronounced Keelan) van der Walt, a chartered accountant, is based in Mauritius. Before founding Regan van Rooy, she spent nine years as the head of the international tax function at South African multinational Sasol, and ten years in UK tax before that. You can contact her on cvanderwalt@reganvanrooy.com.
This article is general information and not advice. Regan van Rooy advises on South African and Mauritian tax; positions in other countries should be confirmed with local advisors.
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