INTERPRETATION ISSUE OF THE PRINCIPAL PURPOSE TEST

Vita Apriliasari

doi:10.31092/jpi.v3i2.734

Abstract

The existence of tax treaties has raised a base erosion and profit shifting (BEPS) concern through the circumvention of the provisions of those treaties. Consequently, following the release of the BEPS Action 6 Final Report by the Organisation for Economic Co-operation and Development, the Principal Purpose Test (PPT) has been introduced as a general anti abuse rule (GAAR) for tax treaties. As a BEPS action minimum standard, the PPT clauses are considered sufficient to prevent tax treaty abuses. However, since there has been no sufficiently clear guidance to the PPT implementation, several interpretation issues seem to arise. This situation is likely to put uncertainties for both tax administrations and taxpayers. This article aims to provide a literature review of the PPT clauses interpretation so as to help them to further address such issues. The discussion focuses on 4 (four) main elements of the PPT, (1) the interpretation of the phrase “one of the principal purposes”; (2) the reasonableness element; (3) the object and purpose of the relevant treaty provision; and (4) the burden of proof of the PPT.

Highlights

Following the release of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action Plans in the late 2015, global taxation landscape has changed significantly
Of several options provided by the MLI, paragraph 90 of MLI Explanatory Statement emphasizes that the Principal Purpose Test (PPT) serves the only self-standing anti-abuse provision satisfying that BEPS minimum standard; it becomes the default option for those joining MLI
The incorporation of the PPT in the text of the DTA reflects the existence of a more powerful tool for contracting states to address tax treaty abuse. This is true in the case of Indonesia as it has not had a general anti-abuse rule (GAAR) in its domestic tax law

Summary

Introduction

Following the release of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action Plans in the late 2015, global taxation landscape has changed significantly This is true for any arrangement or transaction that leads to non-taxation situation which the BEPS Actions have focused on. BEPS Action 6 Report, “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”, has recommended for countries to add an anti-abuse provision to their tax treaties, putting it as one of minimum standards Such a measure be adopted by countries and jurisdiction, including Indonesia by signing the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS ("Multilateral Instrument" or "MLI"), which modifies their bilateral tax treaties. Of several options provided by the MLI, paragraph 90 of MLI Explanatory Statement emphasizes that the Principal Purpose Test (PPT) serves the only self-standing anti-abuse provision satisfying that BEPS minimum standard; it becomes the default option for those joining MLI

Objectives

Discussion

Conclusion