2025: A year to watch for International Tax Developments

The international tax landscape is off to a dynamic start in 2025. On one hand, President Donald Trump, after assuming office on 20th January, announced the U.S.’s withdrawal from its commitment to OECD’s global minimum tax, sparking uncertainties around Pillar 2 implementation worldwide. On the other hand, Indian tax authorities have provided a much-needed clarity on applicability of the Principle Purpose Test (PPT) provisions under tax treaties.

What is PPT? 

The Principle Purpose Test is an anti-abuse measure introduced as part of the OECD’s BEPS Action Plan 6. It allows tax authorities to deny treaty benefits if it is reasonable to conclude that one of the principal purposes of a transaction or arrangement is to secure tax benefits under a treaty, unless such benefits align with the object and purpose of the treaty. By targeting only arrangements with the primary intent of tax avoidance, PPT ensures that legitimate tax planning within the framework of tax treaties remains unaffected.

CBDT has issued Circular No. 1 of 2025, on 21 January, 2025 providing critical clarifications on invocation of PPT provisions under tax treaties, offering relief to genuine cases while reaffirming India’s commitment to curbing treaty abuse.

Key highlights from the CBDT circular: 

1️) Prospective Application: 

PPT provisions apply prospectively. For DTAAs updated bilaterally, the PPT is effective from the entry into force of the treaty or protocol. For treaties modified through the MLI, the date is determined under Article 35 of the MLI.

2️) Grandfathering provisions: 

Grandfathering clauses in DTAAs with countries like Cyprus, Mauritius, and Singapore shall remain unaffected by PPT provisions and would continue to operate under the specific terms of DTAA.

3️) Supplementary Guidance: 

Tax authorities may refer to the UN Model Tax Convention Commentary (2021 update) and BEPS Action Plan 6 Final Report for necessary guidance while deciding on the invocation and application of the PPT provision, subject to India’s reservations, wherever applicable.

This circular strikes a balance by targeting treaty abuse while safeguarding legitimate tax planning under applicable treaty provisions. At a time when global developments bring uncertainty, India’s proactive approach provides much-needed clarity and relief for stakeholders.

With these contrasting developments, 2025 is shaping up to be a pivotal year for international tax. What are your thoughts on these changes?

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