Not long ago, it was rather easy to use Special Purpose Vehicles (SPVs) and other arrangements to facilitate international transactions and obtain the desired tax outcome. 

But times have changed. 

The Economic Organization for Cooperation and Development (OECD) has achieved significant influence over the international tax system. They’ve convinced almost 100 countries to sign on to a tax treaty called the Multilateral Instrument (MLI).

A core component of the MLI is the Principal Purpose Test (PPT). In short, the PPT states that if one of the principal purposes of an arrangement or transaction is obtaining a tax benefit, then the tax benefit can be denied.

Take note, the PPT does not state that a tax benefit is the principal purpose. Rather, the rule applies if a tax benefit is simply one of many principle purposes.

The goal of the MLI is for any tax benefit to be incidental and a mere side effect of a business arrangement or transaction with the principle purpose of which was unrelated to taxation (such as asset protection). By design, the MLI and PPT have significantly reduced the ease of use of SPVs and other arrangements with respect to international tax planning.

Tax treaties were designed to provide clarity. The MLI has achieved the opposite. The MLI and PPT have reintroduced uncertainty to international transactions. In many cases, failing the PPT results in legalized double taxation.

Proper business structuring requires great finesse and a more holistic viewpoint. 

But many High Net Worth Individuals and business owners are sadly unaware of the changes caused by the MLI. For one reason or another, some advisors frequently disregard the MLI. Others intentionally omit MLI considerations when courting new clients.

As a result, many High Net Worth Individuals and business owners are currently using business structures that would likely fail scrutiny or an audit by the relevant tax authorities. 

In addition to the cost of navigating a tax audit, being denied tax benefits for failing the PPT will likely result in an assessment of back taxes and fines. You should also expect enhanced scrutiny over time.

It’s far preferential to review your international tax planning and make the necessary adjustments voluntarily before a tax authority compels changes.

It’s my job as an advisor to structure new deals with proper consideration to the MLI and PPT. The pre-existing business structures of every new client receive a thorough examination to identify possible PPT fail-points.

Watch my latest video for more.

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