Commentator
Professor Christine Osterloh-Konrad, University of Tübingen.
Leader of the assessment
Professor Margrethe Buskerud Christoffersen, Department of Private Law, University of Oslo.
Supervisors
Professor Anders Mikelsen, Department of Private Law, University of Oslo, Professor Eivind Furuseth, BI Norwegian Business School.
About the project
Like other eras of law, tax law provisions incorporate different criteria which through the inclusion exclude other criteria not included in the wording of the provision. Furthermore, when the judiciary interprets the law, they analyze whether a certain set of facts fits the understood scope of the provisions. It can in general be stated that the relevant criteria in the legislation determine the relevant facts. Taxpayers have to a certain extent the discretion to consider potential tax savings by choosing a particular legal structure and/or transaction that minimizes their tax liability. Simply put, the provision in the law determines the relevant facts, but the relevant facts, which can be controlled by the tax subject, can also change which provision that is applicable. Such conduct when a tax subject minimizes their tax liability is generally referred to as tax planning.
The term tax avoidance generally refers to scenarios when a tax subject reduces its tax liability in a way that is permissible by law, i.e. the outcome of the statutory interpretation is a reduction in taxation, while unintended by the legislator. Such unintended tax reduction is primarily codified through a General Anti-Avoidance Rule (GAAR) in an income tax system which creates the dividing line between tax planning and tax avoidance. Consequently, as a main rule, the limits of tax planning are reached when the GAAR intervenes to set aside the arrangement.
This project comprises an in-depth analysis of the interpretation of the Principal Purpose Test (PPT). The PPT rule constitutes a GAAR and has been incorporated into the OECD Model Tax Convention on Income and on Capital (the OECD Model Convention), the BEPS Multilateral Instrument and, consequently, many double taxation conventions (DTCs).
The aim of this project is to analyze whether the PPT rule can be applied when a legal entity with low physical substance and/or low economic activity is interposed to obtain treaty benefits. This can also be articulated as an examination of whether circumstances regarding the reality of the connection of a resident taxpayer with the state of its residence are relevant when assessing whether the subjective and teleological element of the PPT rule are satisfied. This assessment is crucial to determine whether the PPT rule can effectively prevent tax planning strategies where a person, who is not eligible for benefits under a tax treaty, utilizes another person to indirectly obtain those benefits. This type of tax planning arrangement is often referred to as treaty shopping.
Due to its ambiguous and vague nature, the PPT rule leaves many questions and uncertainties unresolved, and various scholars propose interpretations that diverge significantly. The teleological element has been considered to constitute the most controversial and the most important test. It can be considered that since the teleological element explicitly refers to “the object and purpose of the relevant provisions” of the treaty, the effect of the rule becomes restrictive. This is because the wording may be understood as requiring the interpreter to identify explicit support in the relevant sources of law—such as the wording of the provision, the OECD Commentary, or the broader context— that directly establish that the object and purpose of the relevant provisions has been defeated. This is what the author refers to as an understanding of purpose from a legal perspective. However, the author has found that if the general rule of interpretation outlined in Article 31 of the Vienna Convention on the Law of Treaties (VCLT) are applied correctly it is apparent that two distinct human ideas hide behind the wording. In essence, the wording gives rise to two competing interpretations: the PPT rule may operate either as a shield, safeguarding legitimate treaty benefits but lacking the possibility to enact new substance requirements into the relevant provisions, or as a sword, enabling tax authorities to scrutinize and deny benefits to arrangements lacking sufficient economic substance. By rigorously weighing the relevant sources of law, this project will disentangle the competing interpretations, determine the correct approach, and define the limits of its possible variations.
The intended contribution of this project is to prevent the interpretation of this international rule from diverging across jurisdictions. The goal is to dispel certain misconceptions about the rule and thereby contribute to the development of a harmonised understanding and application of the same rule. The intended contribution of this project is also to, more in general, enhance legal certainty and predictability for businesses, while simultaneously illuminating the full potential of the rule, which is of particular relevance to the judiciary.
Program
- Tobias K. Johansson - Presentation (30 min.)
- Christine Osterloh-Konrad - Comments (30 min.)
- Open discussion (30 min.)
- Closed meeting (30 min.)
Guidelines for midway assessments
Guidelines for midway assessments, the PhD programme at the Faculty of Law, University of Oslo
Participate
This event is open to all interested.
Contact
Kristin Koren Viksjø