The “Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting” : An analysis of the Principal Purpose Test from the perspective of Finnish tax treaty practice

Peer review article

Moritz Scherleitner

doctoral candidate at the University of Helsinki

employee at PwC Suomi

The “Multilateral Convention to Implement Tax

Treaty Related Measures to Prevent Base Erosion

and Profit Shifting”

–

An analysis of the Principal Purpose Test from the

perspective of Finnish tax treaty practice

*

Abstract

The heated political debate on aggressive tax practices of multinational entities starts

to produce tangible outcomes. On 7

of June 2017 Finland signed the so-called

“Mul-tilateral Convention to Implement Tax Treaty Related Measures to Prevent Base

Ero-sion and Profit Shifting” (MLI). Certain rules related to the abuse of tax treaties will,

as a result, start to become applicable soon. They can be seen as quite disruptive in

international tax law. Hence, it appears worthwhile to present them to a broader

au-dience. The reader will be introduced into the topic via a short outline of the flaws in

the current international tax system leading to concerns on international (OECD, UN)

and supranational (EU) level. Embedding it into the bigger picture of action against

“Base Erosion and Profit Shifting”, the MLI and one of the Finnish choices – the

Principal Purpose Test – will be elaborated.

The article aims to assess the impact of this provision on Finnish tax treaty

prac-tice. It will be shown that, with respect to different occasions, the Principal Purpose

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* _{The author wants to thank Rami Karimeri and Merja Raunio for commenting on a draft version of the} article. Further, the author thanks an unknown peer-reviewer for his/her comments. All remaining flaws are the author’s.

Test leads to consequences considerably stricter than provided for by current rules.

By itself, this was subject to severe critique in specialist literature. Furthermore, it

raises a number of dogmatic problems. In this context the author attempts to provide

for an interpretation of the provision towards alleviating its effects.

The first two chapters are meant to give non-tax specialists some background

in-formation. They can be widely skipped by readers familiar with the subject. Due to

space limitations constitutional law and European law questions are not within the

scope of the investigation. Also, the analysis of Sec. 28 VML does not reflect the

discussions held in scholarship in detail. That being said, the author is still confident

to be able to make his point based on what is included in the article.

1 Introduction

1.1 International tax law in a nutshell

In essence, a state is allowed to tax where it has jurisdiction to.

What its jurisdiction

to tax is, is a subject of public international law.

In this regard, it is generally

ac-cepted that there must be some connecting factors that link the taxpayer to a

jurisdic-tion.

Principally, these connections can be divided into “personal attachments”

and

“economic attachments”.

Most states combine these principles

and reserve the right

to tax once such an attachment – sufficiently strong – exists.

That means that most

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1 _{For example: Rohatgi 2007, 14.}

2 _{For example: Miller – Oats 2012, para. 2.2; in more detail on that e.g. Kluge 1992, 40–44; Dolzer 2010,} paras 100–105; Avi-Yonah 2004.

3 _{E.g. Rohatgi 2007, 14–15; Lehner 2015, paras 10–18; Schaumburg 1993, ch. 5, 14; Kluge 1992, 12–13;} Schindel – Atchabahian 2005, ch. 2.; Kofler 2016; Ault – Arnold 2010, 429.

4 _{Rohatgi 2007, 15; also, e.g. Kluge 1992, 13.} 5 _Id.

6 _{E.g. Holmes2000, ch. 2; Schindel – Atchabahian 2005, sec. 1.2.1.} 7 _{Compare id.}

of them tax both the activities of its residents and the activities of non-residents in its

jurisdiction.

Finland is no exception thereto.

This can lead to overlapping tax claims and, hence, double taxation of the same

income in the source and residence state.

As this would seriously threaten

cross-border economic relations, states usually aim to mitigate such double taxation.

Fre-quently, this happens through so-called Double Tax Conventions (“DTCs” or tax

treaties, as they are usually referred to).

These tax treaties determine the extent to

which each state may levy tax as foreseen under its domestic law.

Depending on

the type of income the distribution of taxing rights can differ.

In cases Finland is

the residence state double taxation is usually eliminated by the credit method.

In a

few circumstances the exemption method is used.

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8 _{Compare id.}

9 _{In international tax language, a state in its role of taxing its residents is generally referred to as the} residence state; in its role of taxing the activity of foreigners it is referred to as the source state. In a wholly domestic context a state is both, residence and source state.

10 _{Helminen 2009, 29.}

11 _{Pursuant to Art. 81 of the Finnish Constitution (Suomen perustuslaki 731/1999), taxation has to be based} on legislation. As ruled in Sec. 9 para. 1 of the Finnish Income Tax Act (Tuloverolaki 1535/1992, “TVL”) a Finnish resident individual, a Finnish corporate entity or a Finnish estate of a deceased person is subject to unlimited tax liability in Finland. Generally speaking that means that the worldwide income of the taxpayer will be subject to tax in Finland. A non-resident or a foreign corporate entity is, according to Sec. 9 para. 2 TVL, subject to limited tax liability in Finland. Here only income from Finnish sources will be taxable. Certain Finnish source income, such as especially interest, is, however, widely exempt from limited tax liability. See in more detail: Helminen 2009, 43–54.

12 _{See for the different circumstances that can give rise for double taxation, e.g. Lang 2013, ch. 2.} 13 _{E.g. id., ch. 1.3.}

14 _{Alternatively unilateral measures can be employed to reach this goal. This is frequently used in the} context of cross-border income not covered by tax treaties. See id.

15 _Id.

16 _{There can be a taxation in only one of the two states, or there can be a division in taxation rights between} the two states. See e.g. id, sec. 6.4.

17 _{So Finland taxes the income under its domestic law, but allows for a credit of the taxes levied in the} source state in accordance with the tax treaty. See Helminen 2009, 28–29.

18 _{So Finland exempts the foreign income from its taxation. See id., 28, 30. For instance, some Finnish tax} treaties foresee an exemption of foreign source dividends in case a shareholder company holds more than 10% in the dividend paying company. See, e.g., Art. 23 para. 1 lit c) of the tax treaty between Finland and Luxembourg.

Most Finnish tax treaties are based on the OECD Model Tax Convention (MC).

Apart from the Nordic Multilateral Tax Treaty, all Finnish tax treaties are of a

bilateral nature.

Finland applies a dualistic system, which means that Finnish tax

treaties are implemented into domestic law, whereas they are simultaneously

inter-national agreements.

The interpretation of tax treaties is a much disputed topic in

international tax literature.

From a Finnish perspective the Vienna Convention on

the Law of Treaties (VCTL), the OECD MC and the Commentary to the OECD MC,

as well as the Finnish tradition of interpreting domestic tax law, are relevant.

Tax treaties are not the only component of international tax law. As they cannot

create, but only limit taxation rights,

they are not even the most important one.

Rather it is the domestic tax law provisions that apply to cross-border economic

re-lations that lay the ground for a state’s international tax law. These rules come into

effect within a state’s tax jurisdiction and determine whether and to what extent an

item of income will be taxed or not.

As tax treaties are, however, the part of

inter-national tax law that will be changed through the MLI, domestic interinter-national tax law

provisions will not be dealt with in this contribution.

1.2 The broader picture – what’s the issue with the international tax system?

The international tax system as it stands today has its roots in the 1920s.

It was

developed under a bilateral paradigm of an extensive taxation in the residence state

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19 _{Helminen 2009, 4–5: Especially the 1977 version of the OECD Model Tax Convention is relevant.} Deviations between Finnish tax treaties exist at the level of detail. An important exception is the tax treaty between Finland and the United States of America, which is based on the U.S. Model Tax Convention. Some Finnish tax treaties with developing countries contain elements of the UN Model Tax Convention. See for that: id.

20 _{An overview can be found under:} https://www.vero.fi/syventavat-vero-ohjeet/ohje-hakusivu/49062/voimassa_olevat_verosopimukse/ (accessed 10 October 2017). 21 _{Helminen 2009, 5.}

22 _{Instead of many: Engelen 2005.}

23 _{Helminen 2009, 22–23; Note however, that the role of domestic law in the interpretation process is} especially disputed. In fair detail see: Vogel – Rust 2015, paras 70–117.

24 _{Which can be seen as the worldwide practice: See Lang 2013, sec. 3.2.} 25 _{Helminen 2009, 2; Sec. 9 para. 1 Tuloverolaki (TVL) in Finland.}

26 _{See League of Nations, Report on Double Taxation: Document E.F.S.73.F.19. (Geneva, 15 April 1923)} and the following reports.

and a source state that fully makes use of its taxation rights.

Thereupon the

archi-tecture of tax treaties had been developed.

Predominantly, these treaties focused on

the avoidance of double taxation.

With a change in business realities, these paradigms have come under pressure.

Foremost, this has to do with the possibilities to split up and deconstruct business

processes.

Combined with the increasing possibilities to use intermediary entities

located in tax favourable states, some multinational entities were arranging affairs

towards achieving effective tax rates that were well below the nominal tax rates in

their residence states.

In order for international (tax) base erosion and profit shifting activities to be

successful, it is clear that it also requires states whose tax systems provide for

preferential tax rules.

Consequently, the behaviour of certain multinationals is only

one side of the coin.

States offering low/no tax regimes for particular taxpayers or

income, including special provisions on profit measurement create the other one.

Taken together, aggressive tax planning of multinationals can – at least to a certain

extent – be seen as the flipside of harmful tax competition between states.

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27 _{Ault – Schön – Shay 2014; Ault 2013.} 28 _{Compare id.}

29 _{As opposed to ensure that double non-taxation does not take place. Awareness of tax evasion was,} however, already present in the 1920s. See Ault 2013 referring to: League of Nations, Double Taxation and Tax Evasion: Report; C. 216. M. 85 (London 1927).

30 _{OECD, Addressing Base Erosion and Profit Shifting (OECD 2013), p. 35 [hereinafter OECD} Addressing BEPS].

31 _{Compare: Ault – Schön – Shay 2014, 276.} 32 _{Id. Referring to: Grubert – Altshuler 2013, 699.} 33 _{Ault – Schön – Shay 2014, 276.}

34 _Id. 35 _Id. 36 _{Compare id.}

The current tax regime faces difficulties with respect to a number of its

ele-ments.

The field relevant here is tax treaty abuse. Having mentioned that this

be-longs to the most complex areas of tax law as such,

the author will use a simplified

example of one possible form of tax treaty abuse (treaty shopping) to introduce the

reader into the topic.

Consider the following: “A Co.”, a tax resident of state A founds a company in state

B. This “B Co.” acquires 100% of the shares in “C Co.”, which is a tax resident of

state C. There are tax treaties existing between states A and B, and B and C,

restricting an otherwise imposed 25% tax on dividends under the domestic law of the

source state of the income to 10% (A–B) and 0% (B–C). No tax treaty exists between

A and C, so if A Co. held the shares in C Co. directly, dividend distributions would

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37 _{See e.g. OECD Addressing BEPS, pp. 39–40 referring e.g. to mismatches that result from the interaction} of tax systems leading to double non-taxation, or issues emerging under transfer pricing and leveraging with intra-group debt.

38 _{See for more detail e.g. Rust 2015, para. 55–93.}

39 _{It is worth stressing that the example below does not provide for a real life case of treaty shopping. In} practice, legitimate alternative structuring options would be considered. Also the beneficial ownership requirement, which will – for the sake of illustration – be deemed to be fulfilled here (see supra n. 42) would have a major impact on this structure. Nevertheless, the author thinks that the example adequately allows to show the core concerns.

40 _{In sec. 3.2.6 it is referred to another form, which is rule shopping.} 41 _{Assume all are exactly rebuilding the OECD MC.}

be subject to 25% state C tax. Holding shares in C Co. through B Co. consequently

leads to a significantly better tax situation for the overall group.

In this context, the question arises whether or not the interposition of B Co. is

“abusive”.

This judgement is not easy to make and will depend on the

circumstances in which B Co. holds the shares in C Co. In fact, B Co. can be a

func-tionless letterbox company used for the mere purpose of benefiting from the tax

re-duction to 0% as foreseen in the tax treaty between B and C. Taking it to the other

extreme, B Co. can also be engaged in fully-fledged business operations and the

ac-quisition of C Co. by B Co. was purely motivated by real business reasons.

From the perspective of state C this makes a difference. Whereas in the latter case

the reduction of the source taxation is clearly unproblematic,

this is unlikely to be

so if B Co. does not have a real nexus to state B and was only employed by its

share-holder in the third state A to reduce the tax burden of the dividends distributed by C

Co.

As it will be explained below, such aggressive tax practices have recently entered

political debate on international and supranational level (see sec. 1.3). The

“Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base

Erosion and Profit Shifting” is one of the key outcomes of these procedures. As

Fin-land has signed the MLI, some of these rules will become applicable in near future

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42 _{Assume further that C Co. conducts an active business in state C and all receiving companies are} considered to be the beneficial owner of the income. The domestic tax regimes of A and B exempt received intra-group dividends from taxation. The overall tax burden is consequently, reduced from 25% (in case of direct distribution to A) to 10% (through the interposition of B Co.).

43 _{Note that the terminology relating to the broad field of tax abuse and aggressive tax planning is subject} to much debate in international tax law. It is not necessary to engage therein here. Instead, interested readers are referred to: Carrero – Seara 2016; Dourado 2016; Piantavigna 2017.

44 _{According to the OECD the purpose of tax treaties is to “providebenefits in respect of bona fide}

exchanges of goods and services, and movements of capital and persons as opposed to arrangements whose principal objective is to secure a more favourable tax treatment” – see OECD, Action 6 Final Report 2015 – Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, para. 26, subpara. 6 of the proposed OECD Model Commentary on Article X (OECD 2015) [hereinafter OECD Action 6].

45 _{This act of borrowing a tax treaty is commonly referred to as “treaty shopping” – see in more detail e.g.} HJI Panayi 2007, ch. 2; Rosenbloom 1994, 83; van Wheegel 1998, ch. 8. Note, however, that the question of whether or not treaty shopping is inappropriate is also discussed – see for that: de Broe et al. 2011, sec. 5.7. It is worth to mention the following: Whereas some argue that treaty shopping creates undesired loss of revenue in the source state (so here state C), others submit that there is no evidence for that. On the contrary, treaty shopping is said to encourage capital and technology inflows to developing countries. See further: de Broe – Bammens 2010, 52–75. See also: Indian Supreme Court (SC) in IN: SC, 30 May 2002,

Union of India v. Azadi Bachao Andolan. For a discussion of the case in the light of the above arguments see Baistrocchi 2008, 361–365.

(see sec. 1.4). These are the so-called Principal Purpose Test and the new provisions

on dispute resolution. This contribution will analyse the Principal Purpose Test (PPT)

(ch. 3).

1.3 Recent action against “aggressive tax planning”

In a context of severe fiscal consolidation and social hardship, in many countries

en-suring that all taxpayers pay their fair share of taxes is more than ever a priority. Tax

avoidance, harmful practices and aggressive tax planning have to be tackled.

This statement made in the communique of the 2013 G20 summit

revealed the

ur-gency of broad political action against so-called “Base Erosion and Profit Shifting”

(BEPS).

An estimated loss in annual tax revenue of 100–240 billon USD,

combined

with the topic strongly hitting a nerve in general public debate,

does not make this

a surprise.

Indeed, within an impressively short time ways to deal with a realm of different

issues in international taxation were worked out.

Starting with the release of the

report “Addressing Base Erosion and Profit Shifting”,

and the shortly following 15

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46 _{The new provisions on dispute resolution have to be seen together with EU law developments in this} field. Against this background the author plans to devote to this topic a separate article taking this into account. See here especially: Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union, OJ L 265(2017).

47 _{G20, G20 Leaders’ declaration (G20 2013), para. 50.} 48 _Id.

49 _{OECD, Background brief – Inclusive Framework on BEPS (2017), p. 9.}

50 _{Nouwen 2013, sec. 1. Compare also: Brauner 2014, sec. 1 naming as an example the newspaper articles:} C. Duhigg – D. Kocieniewski, How Apple Sidesteps Billions in Taxes. New York Times, 28 April 2012; J. Drucker, Google Revenues Sheltered in No-Tax Bermuda Soar to $10 Billion. Bloomberg, 10 December 2012; and R. Waters, Microsoft’s foreign tax planning under scrutiny. Financial Times, 7 June 2011. See also: OECD, What the BEPS are we talking about, available at http://www.oecd.org/ctp/what-the-beps-are-we-talking-about.htm (accessed at 24 August 2017).

51 _{For more on the background see e.g. Christians – Shay 2017, sec. 2.1.}

52 _{Interestingly, the bad media coverage of tax practices by MNEs was a major impetus for a number of} jurisdictions to act. See for that and more detail: Christians – Shay 2017, sec. 2.1.

53 _{Essentially, the work on the substance was kicked off in 2013 with OECD Addressing BEPS. Most of} the Reports were widely finished in October 2015.

point “Action Plan on Base Erosion and Profit Shifting”

the Organisation for

Eco-nomic Co-operation and Development (OECD) – under G20 mandate –

got the

process of making the “

most fundamental change to the international tax rules since

1920

”

underway.

By October 2015 the final reports on all 15 Actions were

delivered.

Ultimately they aim at reinforcing coherence of corporate income tax

rules on an international level, realigning taxation with the substance of the economic

activities, as well as increasing transparency.

The proposals brought forward in these reports have different imperatives. Some

regulations have the status (i) of minimum standards.

Here all OECD and G20

countries committed to consistent implementation, which will also be monitored.

Some proposals are (ii) recommendations.

As such they constitute an agreed

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55 _{OECD, Action Plan on Base Erosion and Profit Shifting (OECD 2013) [hereinafter OECD BEPS Action} Plan].

56 _{The need to take action against base erosion and profit shifting was already expressed at the 2012 G20} summit in Los Cabos. G20 Leaders Declaration (G20 2012), para. 48; at the G20 2013 summit in St. Petersburg the OECD Action plan was endorsed – see: G20, G20 Leaders’ declaration (G20 2013), para. 50. Notably, the G20 referred to the Action against BEPS in the following communiques as well: in Brisbane: G20, G20 Leaders’ Communiqué (G20 2014), para. 13; in Antalya: G20, G20 Leaders’ Communiqué (G20 2015), para. 15; in Hangzhou: G20, G20 Leaders’ Communique (G20 2016), para. 19; in Hamburg: G20, G20 Leaders’ declaration (G20 2017), para. 20.

57 _{A. Gurria, Closing the tax gap. Speech delivered in Moscow on 20 July 2013, available at:} http://www.oecd.org/about/secretary-general/closing-the-tax-gap.htm (accessed on 18 September 2017). 58 _{Compare for that and see in more detail, e.g., Schelling – Salom – Burkhalter 2016, sec. 1; Christians –} Shay 2017, sec. 2.1.

59 _{Including related material they can be found under: https://www.oecd.org/ctp/beps-actions.htm} (accessed on 18 September 2017). Some rather minor refinements were, albeit, made also after October 2015.

60 _{OECD BEPS Action Plan, pp. 13–14.}

61 _{OECD, Action 5 Final Report 2015 – Countering Harmful Tax Practices More Effectively, Taking into} Account Transparency and Substance (OECD 2015) [hereinafter OECD Action 5]; OECD Action 6; OECD, Action 13 Final Report 2015 – Guidance on Transfer Pricing Documentation and Country-by-Country Reporting (OECD 2015); OECD, Action 14 Final Report 2015 – Making Dispute Resolution Mechanisms More Effective (OECD 2015) [hereinafter OECD Action 14]; The implementation of the minimum standards will be monitored via the Inclusive framework. See: OECD, Background Brief – Inclusive Framework on BEPS (OECD 2017) [hereinafter OECD Inclusive Framework]; OECD, Inclusive Framework on BEPS – Progress Report June 2016 – June 2017 (OECD 2017) [hereinafter OECD Inclusive Framework Progress Report].

62 _{Christians – Shay 2017, sec. 3.}

63 _{These are, inter alia, rules included in OECD Action 6; and OECD Action 5; as well as, e.g., OECD,} Action 2 Final Report 2015 – Neutralising the Effects of Hybrid Mismatch Arrangements (OECD 2015); OECD, Action 7 Final Report 2015 – Preventing the Artificial Avoidance of Permanent Establishment Status (OECD 2015).

general direction to which jurisdictions and practices are expected to converge over

time.

Others come as (iii) best practices.

This means that they present an agreed

general direction the OECD will provide guidance and support to.

The proposed

rules concern (a) domestic law

and (b) tax treaty law.

To become effective, they

have to be implemented by the participating states.

The European Union also took a very active role.

Besides contributing to the

work of the OECD, the EU has set up its own “Action Plan to strengthen the fight

against tax fraud and tax evasion”.

Most importantly that led to the Anti-Tax

Avoidance Directive (ATAD) I

and II.

Herewith, the EU aims for a coordinated

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64 _{Christians – Shay 2017, sec. 3.}

65 _{Included, e.g., in: OECD Action 14, paras 42–59.} 66 _{Christians – Shay 2017, ch. 3.}

67 _{E.g. through Actions 2, 3 or 4.} 68 _{E.g. through Actions 6, 7, or 14.}

69 _{For the sake of accuracy: OECD, Action 8–10 Final Reports 2015 – Aligning Transfer Pricing Outcomes} with Value Creation (OECD 2015) made changes to the OECD Transfer Pricing guidelines. For states (like Finland) who use the OECD guidance when interpreting the application of the arm’s length principle, these changes are applicable without the need of a separate implementation.

70 _{For clarity: The OECD/G20 BEPS Report constitutes soft law. Even though 100 jurisdictions joined the} so-called inclusive framework, and will hence at least implement the four minimum standards, a fair amount of jurisdiction has not yet acted. In this context a special role is played by the United States. Having initially taken leadership, their involvement gradually decreased, especially with the new administration taking over. On the other hand, however, the US already relies on a number of rules brought forward within the BEPS project. For a discussion of the US situation: Brauner 2017, sec. 2.1; Christians – Shay 2017, sec. 4.6.

71 _{In detail: Douma 2017.}

72 _{European Commission, COM(2012) 722 final – An Action Plan to strengthen the fight against tax fraud} and tax evasion final, European Commission (European Commission 6 December 2012).

73 _{Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices} that directly affect the functioning of the internal market, OJ L 193 (2016) [hereinafter ATAD 1 2016/1164].

74 _{Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards} hybrid mismatches with third countries, OJ L 144/1 (2017).

implementation of rules consistent with the OECD conclusions for changes to

do-mestic law drawn in the BEPS project.

Amendments of other directives

and

ele-ments of future legislative projects

also work towards this direction. What concerns

tax treaty law, different areas at EU level are of relevance. On the one hand, these are

(parts of) directives,

and specific recommendations.

On the other hand, also the

fundamental freedoms and state aid law have to be paid attention to in this context.

Furthermore, BEPS was also an issue at the level of the United Nations (UN).

Apart from representing developing countries in the relevant discussion on OECD

level, the UN has published a handbook incorporating assistance for developing

countries to evaluate their current situation with respect to different problematics

emerging in this context.

A significant number of developing countries also joined

the “Inclusive Framework on BEPS”.

Besides having so agreed to implement the

minimum standards, they will join on an equal footing in the technical work and,

through their senior officials, in the OECD Committee on Fiscal Affairs consensus

decision making process.

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75 _{Recital 2 of the Preamble to ATAD 1 2016/1164.}

76 _{Take here the amendments of Council Directive 2011/96/EU of 30 November 2011 on the common} system of taxation applicable in the case of parent companies and subsidiaries of different Member States, OJ L 345 (2011) [hereinafter Parent-Subsidiary Directive 2011/96]: The first time in: Council Directive 2014/86/EU amending Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, OJ L 219 (2014); the second time in: Council Directive (EU) 2015/121 amending Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, OJ L 21 (2015). 77 _{Most importantly, this concerns the CCTB and CCCTB proposals. See: European Commission,} COM(2016) 685 final – Proposal for a COUNCIL DIRECTIVE on a Common Corporate Tax Base (European Commission 2016); European Commission, COM(2016) 683 final – Proposal for a COUNCIL DIRECTIVE on a Common Consolidated Corporate Tax Base (CCCTB) (European Commission 2016). 78 _{Take here especially the General Anti-Abuse Rule contained in: Art. 1 para. 2 of the Parent-Subsidiary} Directive 2011/96.

79 _{E.g. European Commission, C(2016) 271 final – Commission Recommendation of 28.1.2016 on the} implementation on measures against tax treaty abuse (European Commission 2016), p. 3. Note that within this recommendation the Commission also recommends an amendment of the PPT towards carving out arrangements that reflect a genuine economic activity.

80 _{For more details see e.g. Douma 2017, who discusses questions relating to the fundamental freedoms} and state aid law in the context of the OECD BEPS proposals.

81 _{See e.g. Trepelkov – Tonino – Halka 2015, including ten contributions dealing with different BEPS} issues from the perspective of developing countries.

82 _{OECD Inclusive Framework Progress Report.}

The MLI, which is the focus of this essay, serves the implementation of the OECD

proposals for tax treaty law. It contains two minimum standards. One is to be found

in Arts 6 and 7 and focuses on tax treaty abuse. The other one is in Arts 16 and 17,

and deals with dispute resolution. Furthermore, the MLI contains various

recommen-dations and a possibility to choose to apply mandatory binding arbitration for mutual

agreement procedures (part VI comprising Arts 18–26).

1.4 The Multilateral Instrument and the Finnish choices

At the moment, more than 3.000 tax treaties are in force.

Usually they are of a

bilateral nature.

Changes to them must, consequently, also result from bilateral

re-negotiation. It goes without saying that this can take substantial time.

Against the

background of the perceived urgent need to act and in order not to lose momentum,

ways had to be found to avoid such a lengthy process.

The OECD agreed this to be

done by means of a Multilateral Instrument.

One Action of the OECD/G20 BEPS

Action plan was dedicated to the development thereof.

As it first became ready for

signature on 7

June 2017 it can indeed be seen as a remarkable technical

achieve-ment.

In fact, it constitutes one of the most important and innovative initiatives in

international tax law within the last few decades.

Finland is among the 71 states

that have already signed the Convention.

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84 _{OECD, Action 15 Final Report 2015 – Developing a Multilateral Instrument to Modify Tax Treaties} sec. 1 (OECD 2015) [hereinafter OECD Action 15].

85 _{Finland is also part of the Nordic Convention (”SOPIMUS Pohjoismaiden välillä tulo- ja} varallisuusveroja koskevan kaksinkertaisen verotuksen välttämiseksi” 26/1997), which is a Multilateral tax treaty.

86 _{E.g. OECD Action 15, sec. 1.} 87 _Id.

88 _{Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit} Shifting, available under: http://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf (accessed on 12 October 2017) [hereinafter MLI]. 89 _{OECD BEPS Action plan, pp. 23–24}

90 _{OECD Action 15.}

91 _{Christians – Shay 2017, sec. 4.3}

92 _{For that and in more detail: Bravo 2016, sec. 1.}

93 _{The signing parties and their positions, as well as some background material is available at:} http://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-beps.htm (access on 19 September 2017).

Technically the MLI works as follows. First, signing states have to decide which

of their existing tax treaties they include for amendment (which are the so-called

“Covered Tax Agreements”).

Finland included all of its tax treaties, except for the

Nordic Convention and the treaty with Bulgaria.

Secondly, signing states must

de-cide on how to amend the Covered Tax Agreements.

With respect to the minimum

standards included in Arts 6, 7, 16 and 17

of the MLI, signing states can only choose

between different forms of implementation – opting out is, logically, not possible.

In the context of tax treaty abuse Finland will, pursuant to Art. 6, amend the

pre-amble of its Covered Tax Agreements towards the following:

Intending to eliminate double taxation with respect to the taxes covered by this

agree-ment without creating opportunities for non-taxation or reduced taxation through tax

evasion or avoidance (including through treaty-shopping arrangements aimed at

ob-taining reliefs provided in this agreement for the indirect benefit of residents of third

jurisdictions).

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94 _{Art. 1 in connection with Art. 2 para. 1 lit a) MLI.}

95 _{See for background: Valtiovarainministeriö, Monenkeskinen yleissopimus, jolla toteutetaan} verosopimuksiin liittyvät toimenpiteet veropohjan rapautumisen ja voitonsiirron estämiseksi; allekirjoitusvaltuuksien myöntäminen ja odotettavissa olevia varaumia ja ilmoituksia koskevan väliaikaisen luettelon antamisesta päättäminen (Valtiovarainministeriö 2017), p. 2 [hereinafter Valtiovarainministeriö monenkeskinen yleissopimus].

96 _{For the sake of technical completeness, the following should be mentioned: The MLI is, principally,} meant to apply alongside the Covered Tax Agreement, i.e. it does not automatically change the text of the treaty. See for that: OECD, Explanatory statement to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (OECD 2015), para 13. Depending on whether or not there is a relevant provision in the Covered Tax Agreement the MLI can have different effects. It can, for instance, replace the provision of the Covered Tax Agreement. Sometimes, it should modify them. And finally, in case the Covered Tax Agreement does not contain a provision, the MLI provision applies. As noted by the OECD this, in effect, adds the provision of the MLI to the Covered Tax Agreement. The PPT is typically a provision of the latter kind – even though alike provisions having a more narrow scope already exist (also in Finnish treaty practice – see the list Finland provided with respect to Art. 7 para. 17 of the MLI). As convincingly argued by Lang, the MLI does, however, not in fact apply alongside the Covered Tax Agreements. On the contrary, the relevant provisions entered the Covered Tax Agreement – see Lang 2017. The author will follow Lang’s argumentation in this contribution and treat the PPT as being part of the respective Covered Tax Agreement. The importance of this is rather low for our purposes, but for the interpretation conducted in sec. 3.2.7. See supra n. 294.

97 _{For the sake of clarity, Art. 17 is itself not a minimum standard. Still it is in a direct relation to it. It deals} with corresponding adjustments in transfer pricing cases and will be analysed in a future article of this author on the issue. For the purposes of this investigation it is of little relevance. Also, most Finnish tax treaties contain such a provision already – usually in Art. 9 para. 2. For them this is of no importance. 98 _{Art. 6 para. 1 MLI.}

Further, it chose the PPT (Art. 7 para. 1), whereby it renounced on taking the

exten-sion provided for in Art. 7 para. 4.

Regarding the improvements to dispute resolution Finland adopted Art. 16

(mu-tual agreement procedure) without reservations and Art. 17 (corresponding

adjust-ments) with the reservation that the article will not be applied to Covered Tax

Agree-ments that already contain the relevant provision. In addition, Finland has selected to

apply part VI of the MLI concerning mandatory binding arbitration.

With respect to recommendations,

signing states are free to decide whether

they want them to be introduced or not. If not, then they must make a reservation.

Finland did that with respect to any such recommendations.

In order for the changes to become effective the respective other Contracting

States have to share this willingness, i.e. there must be a “match” between the Finnish

choice and the choice of the treaty partner.

Regarding the inclusion of the tax treaty to be a Covered Tax Agreement, 45 of

Finnish tax treaty partners

signed the MLI themselves and included their tax treaty

with Finland as a Covered Tax Agreement. These tax treaties will, hence, be amended

towards containing the minimum standards. Due to Finland opting out from the

recommendations nothing more will be changed.

More than 20 Finnish tax treaty partners did not sign the MLI.

Until they do so

at a later stage, or until the successful conclusion of bilateral negotiations, these tax

treaties will not be amended. The Nordic Convention and the tax treaty with Bulgaria

will be amended through separate negotiations. Further, Finland could adopt some of

_____________________________________________________________

99 _{The meaning of this will be discussed in more detail in sec. 3.2.6 and 3.2.7.} 100 _{Here an opting in is required – see Art. 18 MLI.}

101 _{Included e.g., in Arts 3, 4, 5, 8–15 MLI.}

102 _{The precise Finnish position is available under:} http://www.oecd.org/tax/treaties/beps-mli-position-finland.pdf (accessed 12 October 2017). For the role of Art. 17, which was chosen by Finland for tax treaties not containing the provision despite not being a minimum standard see supra n. 97. In more detail: Valtiovarainministeriö monenkeskinen yleissopimus, pp. 4–5.

103 _{But for the Members of the Nordic Convention and Bulgaria.}

104 _{But for Art. 17 with respect to treaties not containing the provision. See already supra n. 97 and 102.} 105 _{These are: Azerbaijan, Barbados, Belarus, Bosnia and Herzegovina, Brazil, Estonia, Kazakhstan,} Kosovo, Kyrgyzstan, Macedonia, Malaysia, Moldavia, Morocco, Montenegro, Philippines, Sri Lanka, Tajikistan, Tanzania, Thailand, Turkmenistan, Ukraine, United Arab Emirates, United States of America, Vietnam, and Zambia.

the recommendations at a later point in time.

So also already “matched” DTCs can

change, provided the other party to a Covered Tax Agreement has chosen to include

the respective rule as well.

Through the MLI the PPT will enter into more than 1.100 tax treaties.

It is,

hence, by far the most popular way to fulfil the minimum standard regarding treaty

abuse.

The other possibilities, each including a so-called Limitation on Benefits

(LoB) clause,

were only chosen by a minority of signatories.

Finland is,

conse-quently, quite in line with the majority in this respect.

Conceptually, this means the following: Instead of combatting treaty abuse by

making access to the tax treaty dependent on the fulfilment of certain objective tests

– or the discretion of the tax authorities if failing them

– many states decided to

focus on the motive of the taxpayer. If this is, as explained below, “tainted”, the treaty

benefits will not be granted, unless the counterproof of the action being in line with

the object and purpose of the provisions of the tax treaty succeeds.

These latter kind of rules are referred to as General Anti-Abuse Rules (GAARs).

The next chapter will provide for an overview of what these rules are and how they

work (sec. 2.1). Thereupon, the author will briefly deal with the Finnish practice of

using GAARs (sec. 2.2). A summary should help the reader to take with him/her the

key elements of the status quo (sec. 2.3). This should form the ground for a better

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106 _{Recommended in: M. Helminen, Asia: Professori Marjaana Helmisen lausunto monenkeskisestä} yleissopimuksesta ja Suomen alustavia varaumia ja valintoja kuvaavasta muistiosta (VM002:00/2017), p. 3.

107 _{OECD, Frequently Asked Questions on the Multilateral instrument (MLI) (OECD 2017), p. 3. Twelve} states decided to supplement the PPT with an simplified LoB clause. Finland is not among them. 108 _{According to OECD Action 6, p. 10, the minimum standard can be reached by the change of title and} preamble of the Convention towards expressing the treaty partners’ intent “to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements” and implementing (i) the PPT, (ii) a LoB clause and the PPT or (iii) the (detailed version of) the LoB clause plus a rule against conduit finance arrangements. 109 _{The LoB clause has its origins in US Tax Treaty Practice and can, e.g., be found in Art. 16 of the} US-Finland Tax Treaty. Generally speaking the LoB clause prevents treaty shopping by making treaty access depended on passing at least one test that focuses the ownership structure or activity of the company. In addition it includes a discretionary relief clause. In more detail on LoB clauses see e.g: Borrego 2005; Bates et al. 2013.

110 _{Finland is not among them.}

111 _{As foreseen in Art. 7 para. 12 MLI, the simplified LoB clause contains a so-called discretionary relief} clause, based on which a taxpayer not passing one of the tests imposed by this provision can still obtain tax treaty benefits. For that to be possible a request has to be made by the taxpayer.

understanding of the meaning of the PPT for Finnish tax treaty practice as discussed

in ch. 3.

2 Background on General Anti-Abuse Rules

2.1 General Anti-Abuse Rules – what are they about?

The concept of GAARs has existed already for well more than a century.

In modern

times, however, their usage has proliferated.

Usually, but not necessarily,

these

are statutory provisions that apply based on a subjective test, i.e. they look at the

purpose of the taxpayer’s action.

If this lies in avoiding taxes the provision applies.

The avoidance level necessary to trigger such a GAAR can differ widely.

It can be

that a GAAR only applies when there are no plausible rationales for the arrangement

other than obtaining a tax benefit. In other words, the “sole” purpose of the

transac-tion lied therein.

Here the existence of business reasons denies the application of

the GAAR.

Most states, however, foresee lower thresholds and demand for the

rule to apply that obtaining the tax benefit was the “main”, “primary” or “greater”

purpose of the tax payer.

Objective indicators to be used in determining the

sub-jective purpose are sometimes set out.

Where the requirements are fulfilled, the

application of the GAAR, normally, leads to some form of reassessment on the basis

of a hypothetical alternative transaction different to the legal form chosen by the tax

payer to minimise tax.

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112 _{The GAAR included in New Zealand’s revenue law has been there for more than 136 years. See Elliffe} – Smith 2016, sec 22.1.

113 _{R. Krever 2016, sec. 1.1. Krever’s excellent contribution is based on a survey of 36 Countries and} forms the structural basis for this chapter. Observing a current trend to rely on GAARs see Lang 2014, 656; compare also van Wheegel 2010, sec. 2.1.

114 _{They can also have the form of judicial doctrines. See e.g. Vamrak 2016, sec. 23.1.} 115 _{Krever 2016, sec. 1.4.}

116 _Id.

117 _{For genuine and non-fictitious arrangements e.g. in France, see. Dubut 2016, sec. 13.1.}

118 _{With respect to, e.g., Austria this has to be a “remarkable”, “reasonable”, “substantive” or “evident”} non-tax reason. See with reference to Austrian jurisprudence: Wöhrer 2016, sec. 23.1.

119 _{Krever 2016, sec. 1.4.}

120 _{E.g. in Australia: see Krever – Mellor 2016, sec. 3.2.1.}

121 _{Krever 2016, sec. 1.2, outlining and discussing four different groups of GAARs. The most important} ones are the (i) acts and benefits approach and the (ii) economic substance approach. The first one is

Ever since, the merits of using GAARs have been passionately discussed.

Critics tend to emphasise the uncertainties such rules create for the taxpayer.

In

fact, as terms used in GAARs are (by nature) rather broad, it is not easy to predict the

application or non-application of such a provision outside clear-cut cases.

This

factor should not be underestimated. Taxpayers plan and make investments

dependent on after-tax results.

The more uncertain these outcomes are, the higher

the economic distortions tend to be.

On the contrary, those in favour of using GAARs argue that no currently existing

tax system is able to cover every single issue that may arise.

Therefore, it makes

sense to introduce some kind of “

default provision

”

that should combat tax

plan-ning opportunities especially resulting from more detailed tax legislation.

The rule

is, consequently, vague for systemic reasons.

Furthermore, uncertainty can be

alleviated through obtaining advance rulings in which the tax authorities state their

view on a case already in beforehand.

Also, evolving case law should lead to a

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mostly found in Anglo-Saxon jurisdictions and allows tax authorities to recompute the taxpayer’s tax liability based on an alternative transaction they surmise would have been the transaction had the taxpayer not engaged in the abusive one. The economic substance approach works differently because here the reassessment is based on a hypothetical transaction that better reflects the real economic substance of the case. Finland tends to follow the latter approach. See in detail: Helminen 2016a, sec. 12.3.1.

122 _{See, e.g., Krever 2016, sec. 1.1.}

123 _{Id.; see also: Seiler 2016, 292–293; but with respect to UK see: Freedman 2014, sec. 2.}

124 _{Compare e.g. de Broe – Bammens 2010, sec. 3. Which also leads to the rule of law principle to be of} special relevance in such contexts. From a Finnish perspective it seems justified to assume that the Finnish domestic GAAR of Sec. 28 VML is as such not considered unconstitutional. However, the rule of law principle sets limits to the application of the GAAR. See for that: Helminen 2016a, sec. 12.2.5; see further: FI: KHO [Supreme Administrative Court], 3 July 2014, KHO 2014:119; and the discussion in: Raunio 2015; Helminen 2016b; see also supra n. 148.

125 _{Krever 2016, sec. 1.1.} 126 _{Compare into this direction id.}

127 _{Compare e.g. Helminen 2016a, sec. 12.8.} 128 _{Freedman 2014, sec. 2.}

129 _{Freedman 2014, sec. 2 with further references; more or less into this direction also: Brederode 2014,} 780; Snel 2013, 616.

130 _{Compare: Prebble – Prebble 2007, sec. 1.4.}

131 _{In Finland advance rulings for arrangements (potentially) triggering Sec. 28 VML can be obtained from} the tax administration or the Central Tax Board. See VML Secs 85–85a – see: Helminen 2016a, sec. 12.3.2.

better understanding of the GAAR in the course of time.

The (remaining)

uncer-tainty should simply be seen as nothing more than the price that has to be paid for

ensuring the integrity of the tax system.

2.2 Current Finnish practice – Sec. 28 VML

Finland has a long and established tradition in relying on GAARs.

The first one –

concerning communal taxation – was introduced already in 1923.

The one relevant

here – concerning income taxation – has its roots in 1943.

Being now Sec. 28 of

the Act on Tax Procedure (VML)

it reads:

If a circumstance or an arrangement is given such a legal form, which does not conform

to its actual nature or purpose, taxation is carried out as if the actual form had been

used. If it is evident that a price, other compensation or the moment of payment has

been agreed on, or other action has been taken, in order to avoid taxes, the taxable

income and capital can be estimated.

If it is evident that taxation should be carried out in accordance with paragraph 1, all

facts and circumstances that may have an impact on how the case is evaluated must be

carefully investigated. The taxpayer must be given the opportunity to provide

clarifi-cation on the observations. If the taxpayer does not provide evidence that the form

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132 _{Krever 2016, sec. 1.1.} 133 _Id.

134 _{Some scholars have also had the view that full certainty about the application of the tax avoidance} provision is not even desirable, as behaviour whose purpose is to avoid tax should generally be discouraged. See Tikka 1972, 212. Tikka considers that in case the GAAR is applied the taxpayer should have understood that the outcome of his arrangement has not been desirable. The author thanks M. Raunio for providing this reference.

135 _{Helminen 2016a, sec. 12.1; for a comprehensive analysis of the Finnish GAAR, the reader is referred} to this contribution. The present chapter strongly builds thereon; a literature overview can also be found in Aaltonen 2017, ch. 4.

136 _{See id. and also: Knuutinen 2014, 169–170.}

137 _{It was included into Section 95(2) of the Income and Wealth Tax Act (Tulo- ja omaisuusverolaki}

888/1943) – Helminen 2016a, sec. 12.1. 138 _{Laki verotusmenettelystä (1558/1995) (VML).} 139 _{As translated by Helminen 2016a, sec. 12.1.}

used conforms to the actual nature or purpose or that it is not evident that the

arrange-ment was made in order to avoid tax, taxation must be carried out in accordance with

paragraph 1.

The provision contains a substance over form approach

and an anti-avoidance

approach.

Further, it foresees (strict) requirements on the procedures that have

to be followed when applying the GAAR.

There is a significant amount of case

law available.

Typically the GAAR is applied when the tax consequence strived

for by the taxpayer conflicts with the object and purpose of the tax provision, or if

the arrangement used is unusual, artificial, or would be without any purpose if the

tax objective is not reached.

For an arrangement to come into focus of the GAAR at least the “main purpose”

of the taxpayer’s arrangement has to lie in avoiding taxes.

That means that Sec.

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140 _{The provision reads in Swedish; ”Har ett förhållande eller en åtgärd givits sådan rättslig form som inte} motsvarar sakens egentliga natur eller syftemål, skall vid beskattningen förfaras som om den riktiga formen hade använts i saken. Har köpesumma, annat vederlag eller prestationstid i ett köpe- eller annat avtal bestämts eller annan åtgärd vidtagits uppenbarligen i syfte att uppnå befrielse från skatt, kan den beskattningsbara inkomsten och förmögenheten uppskattas.Om det är uppenbart att vid beskattningen bör förfaras så som avses i 1 mom., skall vid verkställandet av beskattningen alla omständigheter som kan påverka sakens bedömning prövas omsorgsfullt samt den skattskyldige beredas möjlighet att förete utredning om de konstaterade sakförhållandena. Företer den skattskyldige inte härvid utredning om att den rättsliga form som har givits förhållandet eller åtgärden motsvarar sakens egentliga karaktär eller syftemål eller att åtgärden inte uppenbarligen har vidtagits i syfte att uppnå befrielse från skatt, skall vid verkställandet av beskattningen förfaras så som avses i 1 mom.”

141 _{Reflected in the first part of para. 1. Regarding the requirement of a tax avoidance purpose to exist in} this context see supra n. 147.

142 _{Reflected in the second part of para. 1.}

143 _{Helminen 2016a, sec. 12.2.1; For the important discussion on the terminology in the context of tax} avoidance readers are referred to Knuutinen 2014 as well as Knuutinen 2013. In short: The Finnish understanding seems to be: (i) “tax planning”, which is the acceptable minimization of tax; (ii) “tax avoidance”, which refers to actions that frustrate the object and purpose of the law, but are not criminal; (iii) “tax evasion”, which is already criminal; see also Tikka 1972.

144 _{Helminen 2016a, sec. 12.2.1.}

145 _{Id., sec. 12.2.2. See for an overview: Tikka et al., ch. 5.} 146 _Id.

147 _{E.g. Lehtimaja 2010, sec. 1.2; Helminen 2016a, sec. 12.2.3. referring to FI: KHO, 17 November 1999,} 1999/3101. Note that this is not so clear for the substance over form part. Based on the investigation requirement incorporated into para. 2 it is, however, assumed that such a motive has to be present also in those circumstances. See also: Knuutinen 2012, 43–44. This was also held recently in: FI: KHO, 7 February 2017, 2017/20.

148 _{In this context it is worth mentioning that the relation of Sec. 28 VML and Sec. 81 of the Constitution} has been discussed in literature. See esp. Knuutinen 2014, 97–105. Also Helminen 2016a, sec. 12.2.5, who

28 VML is not triggered if taxation is only one important reason among other good

reasons.

The GAAR can only be applied if the tax authorities succeed in showing

that it is evident that the taxpayer has acted in order to avoid tax.

After the tax

authorities managed to do so, it is up to the taxpayer to demonstrate that this is not

the case.

This, usually, happens by bringing forward (good) business reasons for

the action or arrangement.

Generally speaking, the threshold for the application of

Sec. 28 VML is regarded as rather high, not least against the background of the strict

evidence requirements.

It has, however, been argued in literature that in the course

of recent action taken against undesired tax planning (see sec. 1.3), the application of

Sec. 28 VML appears to have become more easy.

Once the GAAR applies the legal consequence will, essentially, be a taxation in

accordance with the true economic nature and purpose of the arrangement.

This

may happen through reclassification,

or estimation.

Importantly, a change in

tax consequences through Sec. 28 VML affects more than only the transaction on

which the GAAR is applied.

A shareholder who is allocated income that she

abusively channelled through a company is also allocated the related expenses and

_____________________________________________________________

holds that GAARs are per se not unconstitutional. However, they have to be applied in a way meeting constitutional requirements. In this regard the rule of law principle is of special relevance. Sec. 28 VML must not be applied to fill gaps in the tax legislation (whereby Helminen refers to e.g.: FI: KHO, 5 February 2008, 2008/161). Furthermore, legitimate expectations must be protected when applying Sec. 28 VML (whereby Helminen refers to FI: KHO, 6 November 1997, 1997/2826). For a more detailed analysis of the principle of legitimate expectations in Finnish tax law see: Soikkeli 2003.

149 _{Helminen 2016a, sec. 12.2.3–12.2.4.}

150 _{Id, at sec. 12.2.3 with reference to Ryynänen 2001, 276.}

151 _{Id. – this happended for instance in: FI: KHO, 5 July 2013, 2013/2305.} 152 _{Ryynänen 2013, sec. 5.2.}

153 _{Helminen 2016a, sec. 12.2.4. See in more detail: Ryynänen 2001.}

154 _{Based on: FI: KHO, 19 May 2016, 2016/72 – Nykänen 2016, 37; Aaltonen 2017, 76.}

155 _{Interesting also: Knuutinen 2012, 113–118, who provides for an overview of how many cases} concerning Sec. 28 VML go through the Finnish Court system. As summarised by Aaltonen 2017, at footnote 382, Finnish Courts deal with approx. 25–30 such cases per year. Roughly half of them go to the KHO, who decides on 5–10 such cases per year.

156 _{E.g. Helminen 2016a, sec. 12.3.1.}

157 _{Compare the substance over form approach of part 1 of Sec. 28 VML para. 1.} 158 _{Compare the anti-abuse approach of part 2 of Sec. 28 VML para. 1.} 159 _{Compare in more detail: Helminen 2016a, sec. 12.3.1.}

the company from which the income is allocated away, is not subject to tax on it.

The Finnish GAAR, therefore, has something the author will refer to as “unlimited

effect” in the below.

The Finnish GAAR can also be applied on cross-border transactions.

Hereby,

of course, only the avoidance of Finnish taxes will be picked up.

Whether Sec. 28

VML can be applied in a tax treaty context is a harder question.

For our purposes

it should suffice to say the following: The Supreme Administrative Court applied

Sec. 28 VML, together with the transfer pricing adjustment provision of Sec. 31

VML, in a case concerning the tax treaty between Finland and the Netherlands.

In

doing so, however, the Court did not address the underlying question on the

relation-ship between domestic GAARs and tax treaties.

Apparently, the Supreme

Administrative Court regarded this as unproblematic, because the core issues of the

case were discovered elsewhere.

In more recent case law, however, the Court again

applied Sec. 28 VML in a tax treaty context.

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161 _{Id. referring to FI: KHO, 27.10.1988, 1988/4316; see also: Tikka et al., ch. 25.} 162 _{The author borrows this terminology from: Báez Moreno 2017, sec. 4.2.}

163 _{The above mentioned: FI: KHO, 19 May 2016, 2016/72, was, for instance, a cross-border case.} 164 _{Helminen 2016a, sec. 12.2.6.}

165 _{In essence, the problem lies in the fact that tax treaties are international treaties that bind the Contracting} States and create a legal system of their own. The application of domestic anti-abuse rules may not be in line with the shared expectations of the treaty partners and hence lead to conflicts. See e.g. de Broe – Luts 2015, 136; de Broe 2007, ch. 4; van Wheegel 2010, sec. 2.2; for a discussion see also: Knuutinen 2014, 79–86. A view sometimes brought forward to justify the application of domestic GAARs, under certain circumstances, in a tax treaty context is the following: If the GAAR is applied on the facts of the case, any treaty benefit is considered to depend on this true nature of the transaction. Under this logic a violation of the treaty, hence, does not take place. This is especially relevant with respect to income types where the tax treaty refers to the domestic law classification of the state concerned. Compare for that also: Helminen 2016a, sec. 12.5.1 with further references. Another affirmative view regards domestic anti-abuse concepts to be applicable in a tax treaty context, because it is the right of a state to protect itself against a taxpayer unjustifiably taking advantage of the benefits provided for in a tax treaty. See for that: AT: VwGH [Supreme Administrative Court] 26 July 2000, 97/14/0070 under reference to Loukota 1990, 2–3. In adequate detail on the issue see: Prokisch 2015, paras 101–117. Generally skeptical regarding the applicability of domestic anti-abuse rules in a tax treaty context e.g. Lang 2013, sec. 5.2.

166 _{FI: KHO, 27 December 1999, 1999/4219.}

167 _{Helminen 2016a, sec. 12.5.2 with further references.} 168 _{Namely in the non-arm’s length payment. See Id.} 169 _{FI: KHO, 19 May 2016, 2016/71.}

Based on recent clarification in the Commentary to the OECD MC

– which

was already at other occasions seen as a relevant source of interpretation by the

Supreme Administrative Court

– it seems justified to assume that the Supreme

Administrative Court will also in future cases consider the application of the GAAR

to deny treaty benefits. If, however, the application of Sec. 28 VML leads to a result

conflicting with a provision of the tax treaty, this might not be upheld. In such case

– as also explicitly underlined by the OECD – the treaty provision should prevail due

to the “pacta sunt servanda” principle in Arts 26 and 27 of the VCTL.

Similar

con-siderations can be made with respect to so-called special anti-abuse rules (SAARs).

In order not to increase complexity even further the author refers the reader to

specialist literature here.

2.3 Interim conclusion

As described above, GAARs compose a rather frequent feature of income tax

sys-tems. Such provisions focus on the motives of the taxpayer. If these are, ultimately,

seen as too tax-driven, the provisions applies. Where this threshold lies and what

procedures have to be complied with differs among jurisdictions. Once the

applica-tion of the GAAR is opened, this often leads to a reassessment based on a

hypothetical transaction that is assumed to better reflect the economic substance of

the case. The sensibility of using GAARs is disputed. Critics rely on the inevitable

problematics that come with a provision depending on the subjective motivation of a

taxpayer, i.e. especially uncertainty. Proponents see that as exaggerated and further

stress the necessity of these provisions to ensure the integrity of the tax system.

Finland has a long tradition of using GAARs to combat tax avoidance. For its

applicability the tax motive must at least be the main purpose. The existence of valid

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170 _{OECD Model Tax Convention on Income and on Capital: Commentary (15 July 2014); see in more} detail on the role of thereof e.g. Nieminen 2015a and Nieminen 2015b.

171 _{See e.g. FI: KHO, 20 March 2002, 2002/596.}

172 _{OECD Action 6, supra n. 41, para. 59, subpara. 23 of the proposed OECD Model: Commentary on} Article 1. Positive thereon: Helminen 2016a, sec. 12.5.1. For a literature overview on the issue, including a reference to the Austrian position: Scherleitner 2015, ch. 7.

173 _{Comprehensively: de Broe 2007, ch. 4; see also the recent OECD elaboration thereon: OECD Action} 6, para. 59, subparas 21–26.2 of the proposed OECD Model: Commentary on Article 1, where it is, inter alia, emphasised that SAARs often do not conflict with treaty provisions, as a tax treaty may expressly allow their application. In other cases, a treaty provision may rely on domestic law or does not arrive at a different result as to what is reached after the application of the SAAR. For the Finnish perspective: Lehtimaja 2010, sec. 1.4, 2.4; Helminen 2016a, sec. 12.4.1.

business reasons, consequently, renders the provision inapplicable. Further, the

bur-den of proof requirements are quite strict. The threshold for the Finnish GAAR to

apply is seen as rather high.

If it applies, there will be a thorough reassessment of

the case. The Finnish GAAR has, hence, an unlimited effect. Sec. 28 VML can also

be applied in a tax treaty context.

3 The Principal Purpose Test

3.1 Description

The PPT is a GAAR on tax treaty level. Being included in Art. 7 para. 1 of the MLI

the provision reads:

Notwithstanding the other provisions of this Convention, a benefit under this

Conven-tion shall not be granted in respect of an item of income or capital if it is reasonable to

conclude, having regard to all relevant facts and circumstances, that obtaining that

benefit was one of the principal purposes of any arrangement or transaction that

re-sulted directly or indirectly in that benefit, unless it is established that granting that

benefit in these circumstances would be in accordance with the object and purpose of

the relevant provisions of this Convention.

This provision contains two criteria: The first one is a subjective test. It says that if

the tax authority can reasonably conclude that one of the principal purposes of a

tax-payer’s action was to obtain a benefit under the tax treaty, the respective benefit shall

be denied.

The PPT refers to all limitations on taxation imposed on the source state

under the allocation rules (Arts 6 – 22 OECD MC), as well as the relief from double

taxation under Art. 23 OECD MC and the protection of residents and nationals of a

Contracting State provided for by Art. 24 OECD MC.

The OECD underlines that

the terms “arrangement or transactions” and “directly or indirectly” should be

under-stood broadly.

With respect to the reference to “one of the principal purposes” the

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174 _{Again referring to: id.}

175 _{This is based on Scherleitner 2015, ch. 3.1.1.2.}

176 _{OECD Action 6, para. 26 – the PPT has been proposed as Article X para. 7 of the OECD MC in BEPS} Action 6.

177 _{OECD Action 6, para. 26, subparas 1–6 of the proposed OECD Model: Commentary on Article X.} 178 _{OECD Action 6, para. 26, subpara. 7 of the proposed OECD Model: Commentary on Article X.} 179 _{OECD Action 6, para. 26, subparas 8–9 of the proposed OECD Model: Commentary on Article X.}

OECD emphasises that – after objectively analysing the aims and objectives of all

persons involved – it suffices to conclude

that at least one of the principal purposes

lied in obtaining the treaty benefit. In other words, it does not need to be the sole or

dominant purpose of an arrangement or transaction.

If this subjective element is fulfilled, the objective test comes into play. Therewith

the taxpayer can avoid the application of the PPT, provided he or she succeeds in

establishing that the benefit received by the arrangement or transaction is in line with

the object and purpose of the relevant provisions of the underlying tax treaty.

3.2 Discussion of the Principal Purpose Test

3.2.1 Overview

In the following section the PPT will be discussed. For the sake of conciseness the

author will only pick out selected elements. First, this is the effect the (pure)

intro-duction or non-introintro-duction of the provision can have (sec. 3.2.2). Since not all

Finnish tax treaties will be amended through the MLI, this is of high practical

rele-vance. Secondly, and now moving into the analysis of the provision itself, the focus

will be on the subjective element (sec. 3.2.3), the objective element (sec. 3.2.4) and

the burden of proof requirements (sec. 3.2.5). Further, it will be elaborated on the

potential consequences of the application of the PPT (sec. 3.2.6). Thereafter it will

be tried to interpret the PPT towards alleviating its effects (sec. 3.2.7). Due to being

of extensive complexity and broadness, the topics cannot be engaged with in detail

here.

The same is true for (justified) concerns from the perspective of

constitu-tional law and EU law.

3.2.2 Consequences of the introduction of PPT for the interpretation of other tax

trea-ties

Let us start with outlining two opinions – the one of the OECD and the one supported

by parts of literature. The consequences yielded by the introduction of the PPT into

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180 _{OECD Action 6, para. 26, subparas 10–12 of the proposed OECD Model: Commentary on Article X.} 181 _{OECD Action 6, para. 26, subpara. 2 of the proposed OECD Model: Commentary on Article X.} 182 _{See in more detail: de}