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Comparison between the OECD Guiding Principle and the BEPS Principal Purpose Test: And does the Guiding Principle or the Principal Purpose Test solve the debate of states applying domestic GAAR provisions to disallow the treaty benefits?
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Law, Department of Law.
2018 (English)Independent thesis Advanced level (degree of Master (One Year)), 10 credits / 15 HE creditsStudent thesis
Abstract [en]

The issue of states applying their domestic GAAR provisions to override treaties has been extensively debated in the legal literature. States fighting treaty abuse can be an understandable action; in the same time treaty override is considered as violating international law principles.  States have different views on the issue, which leads to different practices. That leads to states not trusting each other on fulfilling their obligations under the treaties.

       The OECD in the 2003 Model Tax Conventions’ Commentary to Article 1 establishes the Guiding Principle. A test that if fulfilled would allow states to apply their domestic GAAR provisions in case of a treaty abuse. The Guiding Principle lacks any further instructions how the principle should be interpreted. And certain states might have issues with legally applying the principle, as it is established only in the Commentary. The Guiding Principle did not receive the expected support by the OECD members. Thus the debate was still left open.

       In 2015 the BEPS Project under the Final Report of Action 6 establish a Principal Purpose Test. The idea behind the test is the same as under the Guiding Principle. The PPT in a way has improved the Guiding Principle. It has its own commentary, establishing the requirements. The PPT will serve, as a clause that will be modified in the tax treaties, therefore also the application should not be an issue, at least for states that will include this clause when signing the MLI.

       Of course also the PPT is not perfect, and legal scholars have criticized it.  Even though the PPT has established a commentary, some of the elements are still left to be too vague. The PPT is different from the Guiding Principle, the level of proof that the tax authorities have to prove has been lowered, and the burden of proof has also partly shifted to the taxpayer. To some extent it can be argued that the PPT favors the tax authorities.

            However, the MLI and the PPT has yet to still come in force, how states will apply it is to be seen. But in the authors view the PPT should conclude the debate of states applying their domestic GAAR to override the treaty benefits (at best for those states that will include the PPT in their MLI). Main argument is that the PPT was created as a similar to GAAR provision that will exist on a treaty level. In case of a treaty abuse states will not have to apply their domestic law, but they will be able to apply the PPT to disallow the treaty benefits.

Place, publisher, year, edition, pages
2018. , p. 43
National Category
Law
Identifiers
URN: urn:nbn:se:uu:diva-352273OAI: oai:DiVA.org:uu-352273DiVA, id: diva2:1212594
Educational program
Master Programme in International Tax Law and EU Tax Law
Supervisors
Examiners
Available from: 2018-07-02 Created: 2018-06-02 Last updated: 2018-07-02Bibliographically approved

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