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CA Final · Direct Tax Laws & International Taxation · Fundamentals of BEPS

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) modifies covered tax agreements. Which statement about the Principal Purpose Test (PPT) introduced through the MLI, in line with BEPS Action 6, is correct?

Under the Principal Purpose Test, a treaty benefit is denied if it is reasonable to conclude that obtaining it was one of the principal purposes of an arrangement, unless granting it is consistent with the object and purpose of the treaty provisions. It is not confined to a sole purpose.

  1. AA treaty benefit is denied if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of an arrangement, unless granting it is in accordance with the object and purpose of the relevant treaty provisionsCorrect
  2. BThe PPT applies only if obtaining the treaty benefit was the sole purpose of the arrangement
  3. CThe PPT denies benefits only to entities that fail a specified percentage ownership test
  4. DThe PPT is an optional provision and the minimum standard on treaty abuse can be met without any anti-abuse rule

Explanation

The PPT denies a treaty benefit where it is reasonable to conclude, having regard to all facts and circumstances, that obtaining the benefit was one of the principal purposes of an arrangement, unless granting it accords with the object and purpose of the treaty. It is not limited to a sole purpose and is not an ownership test, which is part of the Limitation of Benefits rule. The Action 6 minimum standard requires an anti-abuse rule such as PPT, so it is not wholly optional.

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