South Africa: The unintended consequences of Most Favoured Nation Clauses in Tax treaties
By Francis Mayebe, Candidate Attorney, overseen by Virusha Subban, Partner and Head of Tax, Baker McKenzie Johannesburg
Background
Bilateral tax treaties are mainly based on the principle of reciprocity. Under this principle, one state negotiates better treaty terms with another in exchange for making a particular concession. As is clearly seen in most protocols, the Most Favoured Nation (MFN) clause is usually included as a concession by a developing state looking to renegotiate particular treaty provisions. An illustration of this can be seen in the inclusion of the MFN clause in South Africa's protocols with the Netherlands and Sweden, as it was negotiating to include withholding tax on dividends.
The broad rationale behind MFN clauses stems from the field of foreign direct investmen...