Context:
The Central Board of Direct Taxes (CBDT) has issued fresh guidelines regarding the Principal Purpose Test (PPT) under Double Tax Avoidance Agreements (DTAAs). These provisions will apply prospectively, aiming to streamline tax avoidance measures while ensuring appropriate claims for treaty benefits.
What is the Principal Purpose Test (PPT)?
The PPT prevents tax avoidance by ensuring the primary purpose of a transaction is not merely to obtain tax benefits under a treaty.
· If tax authorities find that the principal purpose is to claim treaty benefits without legitimate economic reasons, these benefits can be denied.
· This aligns India’s tax treaty benefits with international norms, such as the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan.
What is the BEPS Framework?
Base Erosion and Profit Shifting (BEPS) is an Organisation for Economic Co-operation and Development (OECD) and G20 initiative launched in 2016 to combat tax avoidance by multinational enterprises (MNEs) employing profit-shifting strategies.
· These strategies involve moving profits from high-tax jurisdictions to low-tax or no-tax jurisdictions with little or no economic activity, eroding the tax base of high-tax countries by utilizing deductible payments like interest or royalties.
Key Updates in the CBDT’s Guidelines:
1. Guidance on Applying PPT:
The PPT provisions will apply prospectively, affecting future transactions and claims for treaty benefits, and not retroactively.
2. Exclusion of Certain Treaties:
The CBDT clarified that the grandfathering provisions in DTAAs with Cyprus, Mauritius, and Singapore will remain outside the scope of the PPT provisions. Grandfathering protects existing investments under prior rules, ensuring changes do not affect current policies or benefits.
3. Grandfathering Provisions:
Grandfathering clauses in DTAAs with Cyprus, Mauritius, and Singapore, negotiated as part of bilateral commitments, will continue under their original terms and remain unaffected by PPT provisions.
