Breadth of principal purpose test in MLI, Art. 7(1) compared to existing PPT rules (p. 413)
This expression of the PPT is broader than many existing PPT rules in a variety of ways, in particular because it applies where any "one of the principal purposes" is obtaining treaty benefits, rather than focusing on the single principal purpose. The Commentary clarifies that this is intended to make clear that obtaining the benefit need not be the sole or dominant purpose of a transaction, and that it is enough that it is one of those purposes is to obtain benefits. [f.n. 80: ….Action 6 Report, at 58] It also applies to any arrangement or transaction that results "directly or indirectly" in treaty benefits, which is a deliberately broad phrasing intended to sweep in cases in which a transaction entered into for valid commercial reasons is subsequently used for the principal purpose of obtaining benefits. This suggests that operations that might at one time have satisfied the PPT could be deemed, at a later time, to fail the PPT, causing treaty benefits to become unavailable.
Application of MLI PPT to Treaties where there is or is not an existing PPT (p. 413)
The effect of the signing of the MLI will be to incorporate this broad PPT into all of the treaties among the signatory countries (subject to permitted exceptions for treaties already containing a PPT provision). Those treaties fall into several categories:
• Treaties that already contain a PPT that is narrower than the new PPT;
• Treaties that did not contain a PPT, but were between countries with experience applying PPT- type rules to their tax treaties; and
• Treaties that did not contain a PPT, and were between countries without experience applying PPT- type rules.
It is not yet clear as a practical matter how the PPT will be applied in these three situations. While some countries that have experience applying PPT-type rules might be expected to apply the new PPT in line with their past practice, the breadth of the new PPT would permit for substantially more aggressive approaches by countries inclined to take them.
Potential uncertainty under existing PE Articles created by MLI Art 13 (p. 414)
MLI Article 13 is intended to address artificial avoidance of PE status through the use of the specific activity exemptions, which explicitly permit certain activities to be carried on at a location without creating a PE, provided that they are the sole activities carried on at that location. Signatories are permitted to choose to apply one of two options (or neither option). Option A would provide that existing activity exceptions in CTA's would apply only where the activity is of a "preparatory or auxiliary" character. Option B would do the opposite, and would provide that the existing activity exemptions are per se exceptions. Option B reflects a minor change to the existing wording of many PE provisions, which includes a drafting ambiguity that had led to questions about interpretation. [f.n. 96: See OECD, Revised Proposals Concerning the Interpretation and Application of Article 5 (Permanent Establishment) (2012), at 24, available at http://www.oecd.org/ctp/treaties/PermanentEstablishment.pdf.] Although the OECD had appeared to conclude that existing provisions already provided per se exceptions for locations at which only a single listed activity was conducted, Option B would permit countries to revise existing provisions to remove any doubt. This might cause some uncertainty with respect to the positions of countries that choose not to adopt either Option A or Option B.
Anti-fragmentation rule (p. 414)
Options A and B are supplemented by an anti –fragmentation provision, which would cause the specific activity exemptions not to apply to a fixed place of business if the same enterprise or a closely related enterprise carries on complementary functions in one or more places in the same state as part of a cohesive business, and either (1) one of those places is a PE for one of the enterprises, or (2) the overall activity of the combined business is not preparatory or auxiliary in character. [f.n. 98: See MLI, art, 12(4).] …
Principal purpose test can be applied to avoidance of permanent establishment even if only one Treaty (“CTA”) adopts MLI Art. 13 (pp. 414-5)
[E]ven where only one party to a CTA adopts provisions expanding the PE article, it may have effect under the domestic law of a source country if that country invokes the PPT to deny treaty protection. For example, if a source country adopts the expanded PE standard of Article 12 under its domestic law, it may view a structure that does not rise to the level of a PE under an existing unmodified treaty, as having as one of its principal purposes the obtaining of treaty benefits in a manner that is not in accordance with the object and purpose of the PE article.
Vagueness of some free-form reservations to MLI Art. 28 (p. 416)
While the provision applies by default to existing MAP inventories (subject to mutual agreement about the start date for such cases for purposes of the two-year time limit), 12 of the countries that signed up opted to exclude existing cases from arbitration. In addition, unlike with other MLI provisions, parties are permitted to craft their own reservations with respect to the scope of cases that will be subject to arbitration. Those reservations will then control the scope of arbitration as between the reserving parties and other parties to the arbitration provision. [f.n. 126: … art, 28(2)(a).] Such "free form" reservations are subject to objection by other parties, and if a party objects, Part VI will not apply at all between the reserving party and the objecting party. Of the 26 countries that chose to adopt Part VI, 16 made such "free form" reservations. While a full analysis of those reservations is beyond the scope of this article, many of the reservations involve carving out broad, and often vague, categories of cases, including, for example, all cases involving the application of domestic anti-avoidance rules, or all cases involving serious penalties. [f.n. 1 128: See, e.g., MLI positions of Australia, Canada, Finland, France, Ireland, Italy and Singapore... .]
Email this Content