The Role of 'Commercial Reasons' and 'Economic Reality' in the 'Principle Purpose Test' under Art.29(9) OECD Model Tax Convention 2017

Abstract

International Taxation has a new GAAR: the “Principal Purpose Test” as laid down in Art.29(9) OECD Model Tax Convention (2017) and Art.7 Multilateral Instrument. While this new provision emphasises the relevance of the “purpose” of an arrangement or transaction, it does not refer explicitly to a “commercial purpose” or the “economic reality” of the taxpayer’s activities. This article shows that – irrespective of the wording of the GAAR – business purpose and economic reality play a major role for the application of the GAAR. This is due to the fact that a tax-driven arrangement or transaction is only disregarded if the tax benefit in question is not justified in light of the underlying purpose of the relevant tax provision. As the purpose both of a tax treaty in general and of the specific provisions at hand is informed by the willingness of the treaty partners to foster genuine cross-border commercial activities, the “Principal Purpose Test” introduces the notions of commercial purpose and economic reality through the backdoor.

Keywords: International Taxation, GAAR, OECD Model Tax Convention, Principal Purpose Tax, Commercial Reasons, Economic Reality

JEL Classification: K34