Critical Analysis of the Principal Purpose Test and the Limitation on Benefits Rule: A World Divided but It Takes Two to Tango

Ameya Mithe

11 citations0/0 files storedWorld Tax Journal

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Taxation and Legal Issues Economic and Fiscal Studies Corporate Taxation and Avoidance

Abstract

This article focuses on the principal purpose test (PPT) and the limitation on benefits (LOB) provision as two divergent treaty anti-abuse measures presented by BEPS Action 6 and the Multilateral Instrument (MLI). It first traces the evolution of both these measures. Thereafter, it discusses the diverse interpretations of the PPT and studies the double-step application of the LOB in light of the US approach and comments on the merit of a standalone application of each measure as opposed to their combined application in a treaty. The article subsequently observes that while Action 6 recommended a combined application of both measures, the country choices in the MLI show a polarized global implementation of these measures. Most countries (the European Union being at the forefront) prefer a standalone application of the PPT (without the LOB), while the US rejects the PPT and continues to exclusively apply the LOB provision. Lastly, the author proposes a solution to bridge this global divide.

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References

2017Treaty Abuse in the Post-BEPS World: Analysis of the Policy Shift and Impact of the Principal Purpose Test for MNE Groups 2019A Deconstruction of the Principal Purposes Test 2015BEPS Action 6: Tax Treaty Abuse 2010Beneficial Ownership: Current Trends 2017The Reasonableness Test of the Principal Purpose Test Rule in OECD BEPS Action 6 (Tax Treaty Abuse) versus the EU Principle of Legal Certainty and the EU Abuse of Law Case Law 2019The Meaning of the Principal Purpose Test: One Ring to Bind Them All?2017GAARs and Treaties: From the Guiding Principle to the Principal Purpose Test. What Have We Gained from BEPS Action 6?2016Anti-Tax Avoidance Directive (2016/1164): New EU Policy Horizons

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