For a large part of the Western world, the first week of January and especially 6 January, a day called Epiphany in the English language, is associated with the story of the three kings and the burning of Christmas trees. It’s reminiscent of how large corporate legal entity structures are sometimes jokingly referred to as Christmas trees.
These corporate trees have developed over the years as corporations expand into new products and services and into new jurisdictions. And for many reasons — such as liability protection, local requirements for doing business, etc. — it has been common for groups to form new legal entities for new business ventures.
The expansion of the forest (to continue the metaphor) was supported by a proliferation of tax treaties in recent decades, creating a tax framework to mitigate the adverse impact of double taxation on cross-border operations and facilitating the build of global value chain infrastructures. In some cases, it became a tax treaty network where some jurisdictions negotiated access to more favorable source country/residence country tax rates compared with other jurisdictions. And it’s fair to acknowledge that some multinational corporations at that time considered such potential treaty benefits as a factor when deciding on their platforms for foreign investments.
Claiming treaty benefits
The Organisation for Economic Co-operation and Development (OECD) has been trying to confirm that treaty benefits are claimed legitimately through the anti-base erosion and profit shifting (BEPS) framework. In response, governments are beginning to implement recommendations to restrict access to treaties through the so-called multilateral instrument (MLI).
The MLI is an instrument signed by an increasing number of jurisdictions that amends the treaties between these jurisdictions upon ratification by the countries. This ratification is likely to happen in 2018 for many and in 2019 for most participating jurisdictions.
The most pronounced restriction of treaties is the so-called principal purpose test (PPT), which essentially excludes an entity from treaty access if it is reasonable to conclude that obtaining access to the treaty was one of the principal purposes for establishing the transaction with that entity.