The Analysis Of The Anti-abusive Principal Purpose Test Rules

Considering that tax treaties abuse has caused serious harm to the tax rights of each country,anti-avoidance now has become an important part of the international tax rules.However,not all positive tax arrangements can be regarded as treaty abuse,which needs to be identified by exploring the intentions of all parties and following the bona fide principle.To prevent treaty abuse,a lot of doctrines can be applied,such as abuse-of-right doctrine,substance-over-form doctrine and economic substance doctrine.The BEPS and the MLI convention also introduce a series of rules to confront treaty abuse,like the Principal Purpose Test rules(hereinafter referred as “the PPT”).The elements of the PPT include:(a)"one of the principal purposes of the arrangement or transaction",which should rely on a result-based interpretation.If the transaction has a commercial or economic purpose,and the commercial and economic purpose exceeds the tax purpose,the PPT shall not be applied;(b)"the object and purpose of the convention",which shall be interpreted in the context of the entire convention.Considering the subjective test and objective test of the PPT will cause chaos in current context,this analysis method has not been adopted.The determination of the principal purpose of the arrangement or transaction should be based on objective assessment such as reasons,results,effects,and consequences of the scheme.It shall review the agreement or transaction itself,not the taxpayers involved.Benefits of the treaty shall be granted even if there is a tax motive,provided that a genuine economic objective is being pursued.The determination of the object and purpose of the convention should pay attention to that according to the MLI convention,to eliminate double taxation however without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance has been written in existing agreements.Using Variable Interest Entity structure(hereinafter referred as “the VIE”)to list in Hong Kong may have a problem under the anti-avoidance rules.According to the MLI convention,the PPT shall be applied between china mainland and Hong Kong.The establishment of Hong Kong entities brings the effect of tax avoidance,and will probably be regarded as treaty shopping,as the Hong Kong entities are not so indispensable to the VIE and usually don't have separate business operations.