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   February 2019  
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World Tax Journal
 
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Issue No. 1 - 2019 of the World Tax Journal is now available online.

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Number 1 - 2019 contains the following:
 
A Deconstruction of the Principal Purposes Test

Stef van Weeghel

This article provides for a critical examination of the principal purposes test (PPT) of article 29(9) of the 2017 OECD Model Income Tax Convention on Income and on Capital. The focus is on the second part of the PPT, which allows for the granting of treaty benefits in the presence of a tax avoidance motive if that would be in accordance with the object and purpose of the relevant provisions of the OECD Model. Questions are raised as to how exactly the object and purpose are determined, the consistency of the relevant parts of the Commentary on the 2017 OECD Model is discussed, and the Examples that purport to clarify the application of the PPT are critically reviewed. Finally, an effort is made to come to a sensible and workable synthesis of the various aspects of the PPT, including the “nexus” part and the “abusive transactions” part thereof, which will be addressed in some detail, and a concept is explored to extend the multilateral approach taken with respect to the minimum standard of the BEPS Action 6 Final Report to the nexus part of the PPT.

The Meaning of the Principal Purpose Test: One Ring to Bind Them All?

Craig Elliffe

Due to the introduction of the Multilateral Convention (MLI), an ever-growing number of the world’s international tax treaties will contain a treaty-based anti-avoidance rule known as the principal purpose test (PPT). These PPT provisions will almost certainly play an extremely important role in preventing international tax avoidance. With the introduction of such broad and powerful anti-avoidance rules comes the risk of individual countries, through their revenue authorities and their courts, developing divergent and state-centric views as to the interpretation of the PPT. This risk is quite considerable, and there are many reasons why a harmonized basis of interpretation may not, in reality, emerge. If courts pursue an individual and diverse approach to the interpretation of the PPT, the same transaction will be viewed as being effective in one jurisdiction and ineffective in another. From a broader perspective, this is undesirable, and it should not occur for policy and interpretative reasons. Why is the case for interpreting the PPT consistently, with a common meaning, so compelling? There is one major reason, and it is an obvious one: the PPT can now be found in thousands of treaties, and it is exactly the same test in all of these. It is clear that an international autonomous meaning is intended to be introduced through the uniform adoption of the PPT. A universal interpretation may be possible if courts and revenue authorities apply a consistent approach to interpretation. The approach, detailed in this article, suggests that international tax treaties should be interpreted in accordance with (i) the ordinary meaning of the text of the PPT; (ii) due consideration of the context and the MLI’s object and purpose; and (iii) consideration of how the MLI, as a successive treaty, relates to the covered tax agreement (CTA) that it amends. This article analyses the PPT rule from a normative position and sets out an appropriate basis for the approach to interpreting the PPT. Using all available sources and reports, including examples of the application of the test, this article provides a comprehensive framework for interpreting the PPT and answers the following questions, amongst others: (i) How is the PPT designed to override other provisions in the CTA (including other general anti-avoidance rules)? (ii) Is the substantive test based on an objective assessment of the arrangement or transaction or on the subjective position/mind of the taxpayer? (iii) Does the proviso place an onus of proof upon the taxpayer?

New Mandatory Disclosure Rules for Tax Intermediaries and Taxpayers in the European Union – Another “Bite” into the Rights of the Taxpayer?

Nevia Čičin-Šain

The European Union responded to the propositions of the OECD in the BEPS Action 12 Final Report on Mandatory Disclosure Rules (MDR) by creating its own rules in the form of Council Directive 2018/822 of 25 May 2018, which is the sixth amendment of Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC 6). This article focuses on the controversial aspects of DAC 6, namely its impact on the fundamental rights of taxpayers. It investigates (i) how the European MDR indirectly affect the taxpayers’ right to legal certainty and legitimate expectations through active prevention of “aggressive” or “potentially aggressive” tax schemes by rapid changes in legislation; (ii) how they will impact the taxpayers’ right to legal advice and legal representation, as well as the right not to self-incriminate; and (iii) what the interplay is between taxpayers’ right to privacy and data protection and the reporting requirements.

Simulating Tax Minimization Strategies of Multinationals: Evaluating the Effectiveness of Changes in the United Kingdom’s Corporate Interest Deductibility Rules

Ann Kayis-Kumar

One of the most significant international taxation trends has been the rise of thin capitalization rules. However, these rules are one of many legislative approaches to restricting interest deductibility, and since 2015, a new trend has emerged. Increasingly, jurisdictions across Europe and Asia are replacing their thin capitalization rules with fixed-ratio rules in accordance with the OECD BEPS Action 4 recommendation for a net interest-to-EBITDA ratio. Yet, governments are not always able to observe how multinational enterprises structure their internal affairs in response to regulatory changes. Therefore, this article presents a case study of the United Kingdom’s corporate interest deductibility rules over the past 3 decades and analyses these reforms by simulating the behavioural responses of a tax-minimizing multinational enterprise. This review and analysis both facilitate a comparison of the effectiveness of these rules in the UK context, which can inform the framing and evaluation of such regimes in other jurisdictions.

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