Tax Alert
National Tax Technical
OECD completes BEPS Multilateral
Instrument
1 December 2016
In brief
On 24 November 2016, the OECD published the final version of the Multilateral Instrument (“MLI”)
—a single document to amend over 2,000 international tax treaties. The four amendment areas are
hybrid mismatches, treaty abuse, avoiding permanent establishment status and dispute resolution.
From the inception of the Base erosion and Profit shifting (“BEPS”) project in 2013, the OECD
continues to surprise cynics by consistently achieving ambitious milestones and deadlines. Signalling
the transition over the last year from the initial reporting phase to actual implementation of antiBEPS initiatives, completion of the MLI represents arguably the most significant milestone.
In detail
Context
The MLI is one of the critical
aspects of the so-called
“OECD/G20 BEPS package”
i.e. the measures arising from
the Action Plan by the G20
and OECD to address BEPS.
The MLI must be seen in light
of the fact that four Action
Points of the OECD’s 15-point
Action Plan involve changes
to existing in-force Double
Tax Treaties (“DTTs”), so
more than 3,000 DTTs would
need to be amended (ideally
all at the same time). The
MLI is thus the mechanism
through which multiple
countries will amend multiple
DTTs.
The four BEPS Action Points
addressed in the MLI are:
 Hybrid mismatch
arrangements (Action 2);
 Treaty abuse (Action 6);
 Avoiding permanent
establishment status
(Action 7); and
the MLI—deals mainly with
entities. So the MLI would
amend the DTT text so that:
 Improving dispute
resolution (Action 14).
 for “transparent entities”
income might only be
treated as “income of a
resident” of a particular
State to the extent that that
State itself treats it as
income of a “resident” of
that same State;
Each of these four Actions are
covered comprehensively in
separate stand-alone OECD
reports, and the MLI
addresses only the aspects
that require DTT
amendment.
The four BEPS Actions
Hybrid mismatches
The main report on Hybrids
(Action 2) recommends
changes to domestic law as
well as DTTs, so the MLI
naturally deals only with the
latter. And whereas the
recommendations for
domestic law deal mainly
with hybrid payments and
instruments (with less rules
on hybrid entities), the DTT
recommendations—and thus
 “dual resident entities”
might not qualify for any
DTT benefits, unless the
two States agree “by mutual
agreement” on the
residence status of the
entity and the extent of DTT
relief; and
 where domestic law
interventions (in relation to
hybrid instruments,
payments and/or entities)
result in double taxation,
there could be several
options (in the DTT) to
eliminate the double tax.
www.pwc.com
Tax Alert
National Tax Technical
Treaty abuse
In relation to potential treaty
abuse, the first amendment
proposed by the MLI is to
expand the preamble text—to
clarify the intention of DTTs.
That intention is stated to be
the elimination of double tax
without creating tax
avoidance opportunities
(which includes treatyshopping for the benefit of
residents in a third
jurisdiction).
However, perhaps the most
significant aspect of the antitreaty-abuse measures is the
introduction of the “principal
purpose” test (“PPT”) and the
“Simplified Limitation on
Benefits Provision” (“LoB”).
In this regard:
 The PPT focusses on
individual transactions and
seeks to deny DTT relief if
“one of the principal
purposes” (of entering into
the transaction) was to
obtain the DTT benefit.
 On the other hand, the LoB
focusses on the nature and
activities of the resident
(who seeks to claim DTT
relief). Notably, it targets
the underlying shareholding
structure of that resident.
The initial default position
is that no DTT relief is
available for a resident that
is not a “qualifying person”.
However, there are certain
exceptions (e.g. if the
resident actively conducts
business in the residence
State).
Other provisions addressing
treaty abuse include, amongst
others, rules on dividend
transfers and capital gains on
property-rich shares.
Permanent establishments
(“PEs”)
The first amendment relating
to PEs in the MLI expands
the so-called “agency” PE.
Instead of targeting only
scenarios where contracts are
actually concluded in the
source State, a PE could also
be created by a person who
habitually plays the
“principal role leading to”
the conclusion of contracts.
Other provisions in the MLI
target “fragmentation” and
similar (undesirable)
practices. For example,
activities that are ostensibly
exempt (e.g. auxiliary) will
not be exempt if they form
part of an overall fixed place
of business that includes
more substantive activities.
Similarly, in relation to timebased PEs (construction,
consultancy, etc.) the MLI
contains an amendment to
aggregate the periods of
multiple short-term contracts
in respect of “connected
activities” undertaken by
“closely related” enterprises.
Dispute resolution
The MLI also standardises
the treaty rules relating to the
Mutual Agreement Procedure
(“MAP”) which provide for
tax authorities to “endeavour
to resolve” taxpayer
objections.
The MLI also includes an
“Arbitration” Article to
address scenarios where, for
example, the MAP fails.
Signature
The MLI will be available for
signature from 31 December
2016, and a signing ceremony
will be held in Paris in June
2017. Some 100 countries
(including SA)—representing
over 2,000 DTTs—are
expected to sign.
Thereafter, the MLI will need
to be ratified domestically
(i.e. by the South African
Parliament).
Reservations
The MLI’s “Reservations”
system is intended to offer
flexibility. However, it will
also end up resulting in a
complex web of
permutations.
Many MLI Articles include
reservation rules which allow
countries to opt out (partially
or even entirely) from certain
provisions. In most cases,
this means that amendment
Articles will only apply to
DTTs where both States have
not made a reservation (or
have made compatible partial
reservations). That said, it
seems possible in some cases
to end up with asymmetrical
application when different
countries make different
reservations in relation to the
same Article.
However, very restricted
reservation options are
available for the Articles that
constitute a so-called
“minimum standard” of the
BEPS package (e.g. the PPT/
LoB and MAP rules).
2
Tax Alert
National Tax Technical
Consequently, although there
is still some uncertainty as to
what each country will adopt
in relation to certain issues
(e.g. hybrids and PEs), there
is also relative certainty as to
the main outcomes in
relation to treaty shopping
and dispute resolution.
aspects of global structures
that are reliant upon (or
impacted by) specific DTT
rules and treatments.
Key take-away
We will have greater certainty
on which countries will adopt
which amendments over the
next six months (January to
June 2017), as the MLI
signing process proceeds.
The MLI is making
synchronised and fasttracked amendments to over
2,000 DTTs a reality.
Multinational groups should
prepare for the impact of
amended DTTs. This means,
for example, reviewing the
However, we are already
relatively certain that the
main amendments targeting
treaty-shopping will be
adopted by essentially all
signatories. In relation to the
expanded PE inclusions,
indications are that most
signatories (including South
Africa) are highly likely to
adopt the main amendments.
The amendments aimed at
combatting hybrid
mismatches will need to be
monitored on a country-bycountry basis—although the
fact that the success of these
measures is largely reliant on
“coherence” increases the
likelihood of large-scale
adoption. The MAP
amendments are also
relatively certain although
(unlike the other three issues)
this presents more of an
opportunity than an
increased risk.
Let’s talk
For a deeper discussion of how these issues might affect your business, please contact:
JP Borman
Michael Butler
Angus du Preez
Johannesburg
Cape Town
Cape Town
+27 (0)11 797 52 91
+27 (0)21 529 23 93
+27 (0)21 529 23 99
[email protected]
[email protected]
[email protected]
(Dr) Charl du Toit
William Eastwood
Cor Kraamwinkel
Cape Town
Cape Town
Johannesburg
+27 (0)21 529 23 67
+27 (0)21 529 23 94
+27 (0)11 797 50 96
[email protected]
[email protected]
[email protected]
David Lermer
Norman Mekgoe
(Prof) Osman Mollagee
Cape Town
Johannesburg
Johannesburg
+27 (0)21 529 23 64
+27 (0)11 797 54 05
+27 (0)11 797 41 53
[email protected]
[email protected]
[email protected]
3
Tax Alert
National Tax Technical
This Tax Alert is provided by PricewaterhouseCoopers Tax Services (Pty) Ltd for information only, and does not constitute
the provision of professional advice of any kind. The information provided herein should not be used as a substitute for
consultation with professional advisers. Before making any decision or taking any action, you should consult a professional
adviser who has been provided with all the pertinent facts relevant to your particular situation. No responsibility for loss
occasioned to any person acting or refraining from acting as a result of using the information in the VAT Alert can be
accepted by PricewaterhouseCoopers Tax Services (Pty) Ltd, PricewaterhouseCoopers Inc. or any of the directors,
partners, employees, sub-contractors or agents of PricewaterhouseCoopers Tax Services (Pty) Ltd,
PricewaterhouseCoopers Inc. or any other PwC entity.
© 2016 PricewaterhouseCoopers (“PwC”), a South African firm, PwC is part of the PricewaterhouseCoopers International
Limited (“PwCIL”) network that consists of separate and independent legal entities that do not act as agents of PwCIL or any
other member firm, nor is PwCIL or the separate firms responsible or liable for the acts or omissions of each other in any
way. No portion of this document may be reproduced by any process without the written permission of PwC.
4