We are all aware of “base erosion and profit shifting” or “BEPS”. On 5 October 2015, the OECD released its final reports in connection with its BEPS Action Plan including its final report on Action 15 dealing with the development of a multilateral instrument to modify bilateral tax treaties (“Final Report”). The Final Report on Action 15 explores the feasibility of developing a multilateral instrument that would have the same effect as a simultaneous renegotiation of thousands of bilateral tax treaties.

Action 15, more specifically, addresses the need to implement the measures resulting from the work on the entire BEPS Action Plan and specifically those measures that would require amendments to the OECD Model Tax Convention and its Commentary as well as bilateral tax treaties. These measures include the following:

• the introduction of anti-treaty abuse provisions;
• changes to the definition of a permanent establishment;
• improvements to dispute resolution procedures; and
• the introduction of anti-treaty abuse provisions in relation to hybrid mismatch arrangements.

As it would take a substantial amount of time and resources to amend the numerous bilateral tax treaties which are in place worldwide, the OECD recommends a multilateral instrument which would allow all existing bilateral tax treaties to be modified in a synchronised way with respect to the measures resulting from the work on the BEPS Action Plan.

The Final Report states that such a multilateral instrument is desirous and will have numerous benefits including offering the best opportunity for developing countries to reap the benefits of the measures resulting from the work on the BEPS Action Plan, promoting consistent international interpretation about the meaning of the provisions of the multilateral instrument and ensuring a level playing field and fairly shared tax burdens amongst the relevant countries.

The Final Report provides that the multilateral instrument will be governed by international law, will be legally binding on the state parties and will co-exist with bilateral tax treaties. To respect state sovereignty, the state parties will be allowed to commit to a core set of provisions as part of the multilateral instrument, and have the possibility to opt-out, opt-in or choose between alternative provisions with respect to other issues covered by the instrument. The multilateral instrument will modify a limited number of provisions common to most bilateral tax treaties and will add new provisions specifically resulting from the BEPS Action Plan.

The envisaged content of the multilateral instrument is unknown at this stage. The Final Report recommends that the content and actual text of such instrument be discussed and negotiated at an international conference. The terms of such instrument would then be subject to the regular ratification procedures by each party.

With regard to South Africa, the Davis Tax Committee (“DTC”) in its Interim Report on Action 15, recommended that such a multilateral instrument be supported, provided that the amendments that it would bring are appropriate in the context of South Africa’s bilateral tax treaties. The DTC also concluded that the legal framework for the multilateral instrument already exists in the Convention on Mutual Administrative Assistance in Tax Matters (the “Convention”), which South Africa ratified in 2013. The Convention, which regulates information exchange between states, is also a multilateral instrument that performs functions that would otherwise have required the re-negotiation of thousands of bilateral tax treaties. The manner of implementation of the Convention therefore, already appears to be a success story for the OECD.

South Africa is part of the ad hoc group which will be responsible for the development of the multilateral instrument and the inaugural meeting of the group took place on 5 and 6 November 2015. If South Africa is also a signatory to such a multilateral instruments, which will have the effect of amending its existing bilateral tax treaties in line with the measures resulting from the BEPS Action Plan, it is important that taxpayers be provided with the opportunity to provide input and comments on the amendments which are contained in such a multilateral instrument.

Written by Esther Geldenhuys, tax, associate, ENSafrica