Q. Consider the following statements regarding the Principal Purpose Test (PPT):
Statement I: Under the Principal Purpose Test, treaty benefits under a Double Taxation Avoidance Agreement (DTAA) may be denied where obtaining such benefits is the sole purpose of an arrangement or transaction.
Statement II: The Principal Purpose Test seeks to prevent treaty shopping by ensuring that tax treaty benefits are granted only in accordance with the object and purpose of the treaty.
Which one of the following is correct in respect of the above statements?
Answer: C
Notes:
Explanation:
- Statement I is incorrect. Under the Principal Purpose Test (PPT), treaty benefits under a Double Taxation Avoidance Agreement (DTAA) may be denied if one of the principal purposes of an arrangement or transaction is to obtain a treaty benefit, unless granting such benefit is consistent with the object and purpose of the treaty. It is not necessary that obtaining the treaty benefit be the sole purpose.
- Statement II is correct. The PPT is an anti-abuse rule introduced to curb treaty shopping and other forms of tax avoidance. It ensures that treaty benefits are granted only where they are consistent with the object and purpose of the DTAA and are linked to genuine economic activities.
Source- IE
