In the framework of its crusade against aggressive tax planning, the OECD identified a whole set of measures to prevent base erosion and profit shifting (so-called BEPS project). Some of these measures require amendments of countries’ domestic tax laws, while others are to be implemented in double taxation treaties.
Regarding the latter, 93 jurisdictions (including Switzerland) have signed a Multilateral Convention to modify more than 1,200 double taxation agreements. This convention includes the Principal Purpose Test (PPT rule), a new general anti-abuse rule that forms one of minimum standards to be implemented by jurisdictions committed to applying the Multilateral Convention to their tax treaties. It provides that:
"Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement."
The new anti-abuse rule is a principal purpose test, which focuses on the reasons why a specific arrangement or transaction was implemented or is maintained. It provides, in essence, that the benefit of the applicable double taxation convention shall be denied if one of the principal purposes of the arrangement or transaction was to obtain such benefits.
This clause is also being inserted in other double tax treaties on the basis of bilateral discussions and a similar provision is to be found in the EU Parent-Subsidiary directive (as amended on 25 January 2015 by the Council Directive (EU) 2015/121). It aims to provide States with the legal basis to challenge – in a comprehensive manner – all treaty abuse not captured by other more specific provisions.