Study On The Application Of The Principal Purpose Test In International Tax Conventions

In the context of economic globalization,economic exchanges between different countries have become more and more frequent,and cross-border trade has grown.However,the emergence of double taxation has had a negative impact on international commerce.In order to solve the above problems,tax treaties aimed at allocating tax jurisdiction between the contracting countries regarding the same income came into being.The original intention of tax treaties was to ensure that the tax was only imposed once by restricting the tax jurisdiction,thus the double taxation could be eliminated.But the existence of tax treaties and international commerce provides objective condition for the treaty abuse.Tax treaty abuse means the taxpayer creates and enters into an arrangement or transaction for the purpose of enjoying the benefit of certain tax treaty provision that he has no right to enjoy directly,or circumventing limitations provided by the tax treaties,or excluding anti-tax avoidance rules in domestic law by the application of tax treaties which are in higher legal hierarchy.All these kinds of behaviors erode the tax base and reduces the tax revenue of each country.Prior to the Base Erosion and Profit Shifting(BEPS)area,tax authorities basically adopted anti-avoidance doctrines and statutory general anti-avoidance rules(GAAR)under domestic law and the concept of beneficial ownership under international law to challenge abusive transactions or arrangements.However,these methods are not enough to curb treaty abuse.In this context,BEPS Action 6 proposed the principal purpose test(PPT)as a GAAR under tax treaties.In the meantime,in order to incorporate BEPS measures into the existing tax treaty systems in a timelyand coordinated manner,BEPS Action 15 implements the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting(MLI).The MLI is a self-standing convention that can modify existing tax treaties quickly and the PPT becomes the provisions of Article 7 of it.Specifically,Article 7 articulates the PPT,which denies treaty benefits when,once all relevant facts and circumstances are taken into account,obtaining that benefit is one of the main reasons for entering into a specific transaction or arrangement that will result directly or indirectly in reaching that benefit;this criteria rules unless granting that benefit is not contrary to the object and purpose of the relevant provisions of the covered treaty agreements.More and more countries have signed the MLI and chosen the PPT to meet minimum standards.It can be seen that the PPT is not aimed at specific kind of abuse,but intended to cover all types,it is a GAAR in international law.Upon the approval of the MLI in domestic laws,the existing tax networks will be updated to a large extent,which means that the PPT will be anti-abuse rules under many treaties.Therefore,this article aims to research of the standards and application of the PPT.To guide the application of this rule,the OECD has issued several legal documents to explain it.Even so,the application of the PPT still has insufficient aspects,especially the standards of the PPT and the relationship between this rule and special anti-abuse rules(SAAR)in tax treaties.In this context,this paper will study the application of the PPT rules with the above two problems as the starting point.In the introduction,this article takes the research background as the starting point.Specially,it explains the reason why the PPT was proposed to be a GAAR of tax treaties in depth.Also,it reveals necessity and significance of the definition of criteria under the PPT and the interaction of the PPT and the other SAARs.Moreover,this part summarized the contribution regarding the research on the PPT,which laid the foundation for subsequent research.The main body of this article is structured as four parts,including the overview of the PPT,the in-depth analysis of standards of the PPT,the interaction of the PPT and other SAARs in tax conventions and improvement for the application of the PPT in China.The details are as follows:The first part gives a brief overview of the PPT from the perspective of the background of it becoming a GAAR in tax treaties and the germination and unifiedcompilation of it,and then expounds the value and significance of exploring the application of the PPT.Firstly,the author defines the concept of tax treaty abuse,analyzes the similarities and differences between tax avoidance and tax avoidance,and then deeply analyzes the dilemma in application of traditional anti-abuse measures at this stage.These factors reflect the need for harmonized anti-abuse clauses in tax conventions and constitute the incentive for the PPT to be introduced into tax conventions.Next,the author combs the embryonic stage of the PPT,it can be traced back to the guiding principles of the previous model commentaries and the domestic anti-tax avoidance rules of many countries.Then the unified compilation of the PPT was introduced in the BEPS.On this basis,this part analyzes the PPT and puts forward the issues to be studied,which lays the foundation for the full text.The second part analyzes the standards of the PPT in detail.Firstly,this article subdivides the criteria of the PPT into three parts: obtaining the benefits of tax treaties directly or indirectly,obtaining that benefit was one of the principal purposes,granting that benefit in these circumstances would not be in accordance with the object and purpose of the relevant provisions,and identification of the criteria is analyzed one by one.In terms of obtaining the benefits of tax conventions directly or indirectly,the scope of the benefits under tax convention and judgement of relationship of directly or indirectly;As for the obtaining that benefit was one of the principal purposes,the concentration is the concept of one of the principal purposes.The differences and rationality between one of the principal purposes and principal purposes are compared and the considerations for the judgment of one of the principal purposes are put forward.In terms of granting that benefit in these circumstances would not be in accordance with the object and purpose of the relevant provision,the object and purpose of the relevant provisions and the entire tax conventions are defined,and economic substance is the external manifestation of the object and purpose is further confirmed.The third part analyzes the interaction of the PPT and other SAARs under tax treaties.To be specific,this part discusses in three aspects: the relationship between the PPT and the limitation of benefits(LOB)from the perspective whether the fact pattern could be covered by both PPT and LOB or not,the relationship between the PPT and the beneficial ownership from the perspective that the adoption of a rather formal and legal interpretation or a broader substance-over-form approach in theinterpretation of beneficial ownership,and on the basis,the relationship between the PPT and other SAARs is further explored.This part mainly analyzes the application of the PPT in the current stage of China and the corresponding improvement suggestions.First of all,this article analyzes the application status of PPT rules in China,and clarifies the main problems in the process of that rule applying.Then,combining the above problems with the applicable research of the PPT in the previous part,the article puts forward that suggestions for improving the application of PPT rules in China could be expanding and unifying the application of the PPT in international tax conventions and clarifying the application of the PPT.