Abstract
This dissertation examines the nature and purpose of the Principal Purpose Test (PPT) introduced by the The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), as well as potential conflicts arising from the interaction with domestic General Anti-Avoidance Rules (GAARs). The MLI is expected to amend close to 3000 bilateral tax treaties, ultimately incorporating the provisions of the PPT into the existing treaties.
The PPT aims to address tax treaty abuse, including tax treaty shopping, as part of Base Erosion and Profit Shifting (BEPS) by multinational enterprises (MNEs). Regardless of the extensive literature on the PPT, the broad and untested application of the MLI and PPT creates significant uncertainty for taxpayers and tax administrations. This study highlights the challenges in achieving consistent application and interpretation of the PPT across various countries, complicating tax planning, compliance, and administration.
This uncertainty is significantly problematic in developing countries that rely heavily on corporate income tax and require an increase in foreign direct investment for economic growth. The dissertation emphasizes the need for alignment and a common understanding among tax courts, administrators, practitioners, and policy-makers to address these complexities. It underscores the potential negative impact on international relations and business confidence.
The primary research objective is to critically evaluate existing knowledge and identify areas of alignment and gaps in understanding the PPT’s workings and the potential conflicts arising from the co-existence with the already existing GAAR’s. The secondary objective is to provide considerations for the tax community in applying the PPT to cross-border transactions utilising tax treaty benefits.
The study also considers the interaction between the PPT and domestic GAARs, with a focus on South Africa’s recent adoption of the MLI. The research employs an interpretivist paradigm and qualitative methodology, relying on doctrinal research to achieve its goals.