Parv Baxi, SVKM’s NMIMS Kirit P. Mehta School of Law
ABSTRACT
Tax treaties have had a widespread presence in the current trade-extensive economy setup. While its existence has been the need of the hour, especially to help in following a set practice, the same has also given rise to concerns regarding base erosion and profit shifting (BEPS), primarily due to parties discovering loopholes within the articles established within those treaties. In response to this issue, the Organisation for Economic Co-operation and Development (OECD) released the BEPS Action 6 Final Report, which introduced the Principal Purpose Test (PPT) as a general anti-abuse rule (GAAR) for tax treaties. As a minimum standard for BEPS actions, the clauses related to the PPT serve as a solid foundation and are thus deemed adequate to mitigate abuses of tax treaties. Nonetheless, the lack of sufficiently clear guidance for the implementation of the PPT has led to various interpretational challenges. This scenario is likely to create uncertainties for both tax authorities and taxpayers. This study intends to provide a review of the literature concerning the interpretation of PPT clauses to assist in addressing these issues. This research paper will concentrate on four key elements of the PPT: (1) the interpretation of the phrase “one of the principal purposes”; (2) the reasonableness aspect; (3) the object and purpose of the relevant treaty provision; and (4) practical application of the PPT in the Indian context. Further, this study aims to analyse India’s position with respect to implementation and interpretation of the PPT.
Keywords: principal, treaty, interpretation, object and purpose.
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