1. The PPT and the EU Standard of Good Tax Governance

In a recent article written by this author on the standard of good governance in tax matters for third (non-EU) countries the implications of the BEPS 4 Minimum Standards for third countries was analyzed. The ECOFIN Council has decided in April 2018 that this standard should also include in addition to transparency, exchange of information, fair taxation also the BEPS 4 Minimum Standards including the PPT of BEPS Action 6 (FISC 180 ECOFIN 364). This Standard is included in trade agreements, strategic partnership agreements, free trade agreements and is also required for countries receiving EU development aid. In respect of aid, the Commission stated that “third countries eligible for development aid should also enhance commitments on tax governance. Otherwise, aid funding may be reallocated to other countries, or in some cases even canceled” COM (2009) 201 final). More recently, the Standard has been also used to determine whether third (non-EU) countries should be included in a single EU common (black) list of non-cooperative jurisdictions. (COM (2016) 24 final).

For the negotiation of agreements, in order to be entitled to EU development aid and in order to be outside the list of the EU non-cooperative jurisdictions, the ECOFIN Council  requires countries not only to implement the BEPS 4 Minimum Standards (including the PPT), but also to receive a “compliant” rate for the application of these standards by the BEPS Peer Review Group. This means two things: first that countries that have not committed the BEPS Inclusive Framework will be required to commit the BEPS 4 Minimum Standards (e.g. Philippines who decided not to be part of the Inclusive Framework, but may be obliged to adopt the BEPS 4 Minimum Standards as one of the ASEAN countries due to the ongoing treaty negotiations for a strategic partnership between EU and ASEAN countries. Second, this Standard can be relevant for the current negotiation of the new Cotonou Partnership Agreement between EU-ACP countries (African, Caribbean, Pacific) which also includes among the key areas for cooperation in regional partnership good governance. Therefore, further research should be carried out in the way that this standard will be implemented and enforced in the agreements concluded by the EU and third (non-EU) countries.

2. The PPT and Global Tax Governance: Some remarks

The description of the developments in the international tax (minimum) BEPS PPT standard provided in blogposts 1, blogposts 2 and   this blogpost 3 shows that countries are making different choices in the implementation of BEPS, but also that there are issues that will need to be addressed by tax administrations, ministries of Finance, law-makers, scholars, tax advisors, and taxpayers. The aim should be to find out how the PPT affects legal certainty for business, how to enhance revenue mobilization and prevent treaty abuse while balancing the need of (mainly) developing countries to attract investment. The current ongoing process of ratification of the MLI shows that it is difficult to have a coordinated position regarding international tax standards. This brings more uncertainty, but also more compliance burdens for the tax administration, and taxpayers in general.

In addition some countries are also implementing other actions e.g. BEPS Action 12 (Disclosure of Aggressive Tax Planning Arrangements).  This Action is required for EU countries in light of the amendments to the Administrative Cooperation Directive ((Council Directive 2018/822/EU of 25 May 2018 DAC 6). Furthermore, some countries are opting in or opting out of the MLI anti-abuse provision of articles 8 (for dividend transfer transactions) and 9 (capital  gains  from  Alienation  of  Shares  or  Interests  of  Entities  Deriving  their  Value  Principally from Immovable Property). The result is more complexity in the implementation of the BEPS standards and the PPT, since the PPT as general GAAR in the MLI will have to interact with article 8 and 9 of the MLI and the information provided to comply with DAC 6 (i.e. BEPS Action 12) can be also used by tax administration for applying the PPT, the relationship between PPT and Action 12 and PPT and art. 8 and 9 should be further object of analysis.

This shows how difficult is to reach multilateral solutions if countries are choosing their own solutions (e.g. the United States regarding the use of anti-conduit financing arrangement provisions and countries signatories of the MLI making different choices). These choices can also change mainly to the interaction between Government and law-maker (Parliament/Congress) for instance in the case of the Netherlands.

The broad scope of application of the PPT is also the result of the lack of reference to ‘genuine economic reality’ or to ‘artificiality’ as elements for a PPT analysis (except in the EU), and this also gives more freedom to tax administrations to act, which also causes even more uncertainty. Countries, including their tax administrations, may act differently and provide different interpretations of a transaction resulting in treaty abuse or not. This interpretation can also be challenged before a court based on general principles of law such as good faith. Therefore, it remains to be seen how the application of the PPT by tax administrations will be followed in judicial practice, and if there will be differences between common law (using judicial precedent) or civil law (more formalistic, literal interpretation of the law) countries.

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