Principal Purpose Test

Tax motivated transaction IPSO Facto may not be regarded as Sham

In today’s economy, a business entity cannot undermine the impact of taxation on its growth and development trajectory, which is why tax planning is considered to be the most pivotal part of financial planning. While the line between tax planning and tax evasion is very thin, the Supreme Court, on various occasions, has differentiated between the two concepts and has repeatedly held that minimisation of tax liability through legitimate tax planning is not illegal.[1]


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MLI Impact on Treaty Benefit Tax Blog

The Base Erosion and Profit Shift (“BEPS”) programme, initiated by OECD, had recommended a host of action plans, which could be implemented by making changes to the international tax treaties. . However, there are more than 3000 bilateral tax treaties entered into by contracting countries and it would have taken years to amend them. To solve this problem, over 100  jurisdictions negotiated and concluded a multi-lateral instrument (“MLI”) in November 2016. Countries that agreed to change their tax treaties were required to sign and notify the OECD Secretariat.  India was amongst the first few signatories to the MLI in 2017 and ratified   it on June 25, 2019. Thus, its network of bilateral tax treaties would be impacted by the provisions of the MLI where its treaty partner is also a signatory. It is, therefore, necessary now to read the applicable tax treaty with MLI, based on the treaty partner’s position and reservations on the provisions of the MLI.
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