Transcript Document

DIFFERENT CONCEPTS OF ABUSE AND
NATIONAL ANTI-ABUSE LAW
Prof. Frans Vanistendael
Academic Chairman
International Bureau of Fiscal Documentation
Director European Tax College
Stockholm, 16 June, 2009
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Table of Content
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Different concepts of abuse at different levels
(international, EU, national)
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Is there an implied concept of abuse as a principle
of intrepretation of EU or international tax law?
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Are recent national tax measures anti-abuse
measures or rather structural changes in the
national tax system?
•
Can these new measures be contained, so as to
eliminate double taxation in the EU?
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Three Different Levels of Abuse
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I Abuse at Eu level
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II Abuse at the international (non-EU) level
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Abuse at national level
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Within EU abuse concept at EU level controls all
other abuse concepts on cross-border transactions
and on national transactions using EU concepts.
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Concepts of Abuse at EU Level
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Reference to national anti-abuse measures
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Abuse concept in directives
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Abuse concept in the case law of the ECJ
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Abuse Concept in Directive
C-28/95, Leur Bloem, 17.07.1997
nr. 41: “In order to determine whether the
planned operation has such an objective the
… national authorities cannot confine
themselves to apply predetermined
general criteria but must subject each
particular case to a general examination, …
open to judicial review”.
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Abuse Concept in Directive
nr. 42: “The examination may include the
factors mentioned by the Gerechtshof:
(acquiring company does not carry on business; same person
is shareholder of all companies involved; the operation is
carried out in order to bring about horizontal setting off of tax
losses)
However none of these factors may be
considered to be decisive on its own”.
nr. 44: “…the laying down of a general rule
automatically excluding certain categories …
on the basis of criteria … mentioned …
would go further than is necessary …”
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Halifax: free choice
nr. 73: “… a trader’s choice between exempt
transactions and taxable transactions may be based
on a range of factors, including tax considerations
relating to the system…taxpayers may choose to
structure their business so as to limit their tax
liability”.
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Halifax: abuse requires two elements
nr. 74: “… an abusive practice can be found to exist
only if first, the transactions concerned,
notwithstanding formal application of the conditions
laid down by the relevant (legal) provisions … result
in … a tax advantage the grant of which would be
contrary to the purpose of those provisions.”
nr. 75: “ Second, it must also be apparent from a
number of objective factors that the essential aim
of the transactions concerned is to obtain a tax
advantage. … the prohibition of abuse is not
relevant where the economic activity carried out
may have some explanation other, than the mere
attainment of tax advantages.”
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C-425, Part Service, 21.02.2008
nr. 40: « … the referring court asks, in essence, whether
the Sixth Directive should be intepreted as meaning
that there can be a finding of an abusive practice
when the accrual of a tax advantage is the principal
aim of the transaction… or if such finding can only
be made if the accrual of that tax advantage
constitutes the sole aim pursued … »
nr. 45: « … the Sixth Directive must be interpreted as
meaning that there can be a finding of an abusive
practice when the accrual of a tax advantage
constitutes the principal aim of the transaction … »
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C.S.: Abuse of Community Law
nr. 35: “…Nationals of a Member State cannot attempt,
under the cover of the rights created by the Treaty,
improperly to circumvent their national legislation.
They must not improperly or fraudulently take
advantage of provisions of Community law”.
nr. 36: “… the fact that a Community national, whether a
natural or a legal person, sought to profit from a tax
advantage in force in (another) Member State …
cannot in itself deprive him from the right to rely on
the provision of the Treaty.”
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C.S.: wholly artificial arrangement
nr. 51: “A national measure restricting the freedom of
establishment may be justified where it specifically
relates to wholly artificial arrangements aimed at
circumventing the application of the legislation of
the Member State concerned”.
nr. 52 and 54: “It is necessary in assesing the conduct
of a taxable person, to take particular account of
the objective pursued by the freedom of
establishment … the concept of establishment
within the meaning of the Treaty provisions …
involves the actual pursuit of an economic activity
through a fixed establishment … for an indefinite
period”.
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C.S.: conditions for abuse
nr. 64: “In order to find that there is such an arrangement
there must be, in addition to a subjective element
consisting in the intentiion to obtain a tax
advantage, objective circumstances showing that,
despite formal observance of the conditions laid
down by Community law, the objective pursued by
freedom of establishment,… has not been achieved”
nr. 65: “… in order for the legislation on CFC’s to comply
with Community law, …taxation … must be excluded
where, despite the existence of a tax motive, the
incoporation of a CFC reflects economic reality”
nr. 66: “That incoporation must correspond with an
actual establishment to carry on genuine economic
activities”
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Abuse in International Law
De Broe (2008), International Tax Planning and
Prevention of Abuse, p. 306:
« The doctrine of abuse of rights between States exists
in international law and is even enunciated in
treaties conferring rights on individuals who are the
subject of such treaties. However there is no
unanimity among authors whether abuse of rights
by States is recognized as a principle of
international law and there is no case law of the ICJ
that characterizes the concept of abuse of rights as
such a principle. »
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Abuse in International Tax law
OECD (2008), Art. 1, 7.7:
The purpose of tax conventions is also to prevent tax
avoidance and evasion.
“Taxpayers may be tempted to abuse the tax laws of a
State by exploiting the differences between
various countries laws.”
Question 1: “whether the benefits of tax conventions
must be granted when transactions constitute an
abuse of the provisions of these conventions …”
Question 2: “whether specific provisions and
jurisprudence rules of the domestic law of a
Contracting State that are intended to prevent tax
abuse conflict with tax conventions.”
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Abuse in International Tax Law
OECD (2008), Art. 1, 9.3, 9.6 and 10:
“ … it is agreed that States do not have to grant
benefits of a double taxation convention where
arrangements that constitute an abuse of the
provisions of the conventions have been
entered into.”
“Where specific avoidance techniques have been
identified … it will often be useful to add to the
Convention provisions that focus directly on the
relevant avoidance stategy.” Ex.: concept of
“beneficial owner” for art. 10, 11 and 12 and the
artiste company in art. 17.
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Abuse in International Tax Law
OECD (2008), Art. 1, 9.5
NO CLEAR DEFINITION OF ABUSE
“A guiding principle is that the benefits of a double
taxation convention should not be available where a
main purpose for entering into certain transactions
or arrangements was to secure a more favourable
tax position and obtaining that more favourable
treatment in these circumstances would be
contrary to the object and the purpose of the
relevant provisions.”
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International Case Law on Abuse
Supreme Court of India, 07.10.2003, Treaty India –
Mauritius
IBFD nr., 2003-(263)-ITR-0706-SC
Foreign Institutional Investors did incorporate in
Mauritius to take advantage of a circuclar tax letter
in India, exempting sales of shares in Indian
companies by non-residents from capital gains tax
in India.
The Supreme Court stated that, if it had been intended
that a national of a third state would have been
precluded from benefits of the India-Mauritius treaty
a suitable limitation of benefits article would have
been included in the treaty. If such article does not
exist, it cannot be read into a treaty.
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International Case Law on Abuse
Supreme Court of India, 07.10.2003
The principles of interpretation of treaties are not the
same as those on the interprettaion of domestic
legislation. An important principle of interpretation of
a treaty is that treaties are negotiated and conducted
at a political level and have several considerations
for their existence, the main being aiding commercial
relations between treaty partners. Treaty shopping
should be addressed by the governments and
not by the courts.
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International Case law on Abuse
Bundesfinanzhof, 25.02.2004, Treaty Germany-Ireland
IBFD nr. IR 42/02
German AG held 10% of shares in two, Dublin docks,
companies, having a board of directors, but no
personnel, and a contract for management and
accounting services with an Irish investment bank.
Irish dividends received by AG were exempt, on a
10% shareholding under the treaty. German tax
authorities disregarded the existence of the two Irish
companies on the basis of the German GAAR in
sec. 42 of the Abgabenordnung (general tax law).
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International Case Law on Abuse
Bundesfinanzhof 25.02.2004
The interposition of Irish IFSG companies is not
abusive. The participation of a domestic company in
a capital investment company located in a foreign
low-tax jurisdiction does not constitute an abusive
legal structure only because the securities abroad
are handled by a management company. A
distinction must be made between the
interposition of a non-operative base company
and an operative capital investment company
deriving passive income, the latter is not abusive, if
established for a substantial period of time. The
federal court referred to C-167/01, Inspire Art,
30.09.2003.
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International Case Law on Abuse
Bundesgericht (Swi), 28.11.2005, Treaty Switzerland –
Denmark
IBFD nr. 2A.239/2005
A Swiss SA distributed a dividend, subject to 35% Swiss
withholding tax, to a Danish parent (100%), which
was owned via a Guersney and a Bermuda
company by a Bermuda individual resident. The
Danish parent claimed reimbursement of the
withholding tax on the basis of a Danish residence
certificate. Swiss authorities refused on the basis
that the holding did not carry on any activity and that
its only purpose was to request application of the
zero tax rate under the Danish-Swiss treaty.
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International Case Law on Abuse
Bundesgericht (Swi), 28.11.2005
The only issue was whether the refund could be refused
because of abusive use of the treaty. There was no
explicit anti-abuse rule in the treaty and the Swiss
domestic anti-abuse rules did not apply.
Therefore the only remaining question was: does an
anti-abuse rule exist by way of interpretation? .
According to the OECD commentary (Art. 1,9.4) it is
an internationally recognised principle that states are
not required to grant treaty benefits in the presence
of abuse. This coincides with the interpretation in
good faith (Art. 31 VC), which includes
protection against abuses. Holding company was
not active in trade or business and could be
disregarded.
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Conclusion on case law
1. ECJ: two concepts of abuse: tax is sole motive or
predominant motive. Sole motive for protection of
EC treaty freedoms, predominant motive for VAT or
all other legislation outside the scope of EC treaty.
2. ECJ: abuse of Community law is accepted as an
inherent principle of interpretation of all (primary and
secondary) EU law, without necessity of codification.
3. International case law: disparate and unpredictable
decisions, no agreement on abuse of law as an
inherent principle of interpretation of international tax
law and treaties.
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Conclusion in case law
The main problem with the case law is that the principle
of “la voie la moins imposée” and the concept of
abuse with tax as one of the dominant motives do
not match.
Practically all business decisions are also steered by
tax considerations, but courts and tax
administrations have no instruments or criteria to
weigh tax against non-tax considerations in an
objective way. Therefore abuse is often in the
eye of the beholder.
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Member States Legislative Action
Faced with ECJ decisions, EU member States have
taken legislative action:
Retooling thin cap and CFC rules, sharpening transfer
pricing rules on transfer of functions under the
banner of anti-abuse legislation (Ger., Dk., Nl., It.)
Proposals for new measures in NL and UK.
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Problems with Leglisative Action
1. Most of the new measures do not qualify as antiabuse measures, because they also cover bona fide
business relationships and arm’s length
transactions. In the EU discriminations and
restrictions caused by the new measures cannot be
justified on the basis of tax avoidance or fiscal
supervision.
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Problems with Legislative Action
2. The current reforms and proposed reforms are rather
attempts to fundamentally amend the tax base by
abandoning the principle of net income taxation. It
is a shift from arm’s length taxation to fractions
of formula apportionment. Because of their fiscal
sovereignty Member States still have the power to
change their tax base. The resulting restrictions are
not necessarily discriminations prohibited under the
EC treaty, but often result in double economic or
juridical taxation because of disparities in national
legislation. Such disparities have been admitted by
the ECJ as not contrary to the fundamental
freedoms.
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Problems with Legislative Action
3. Can this legislative trend be stopped by the ECJ
under the EC treaty? Member States still must
legislate in conformity with the EC Treaty. The ECJ
has repeatedly stated that double taxation is against
the core of the internal market. It is suggested that
on the basis of art. 10 (M.S. shall abstain from any
measure which could jeopardise the attainment
of the objectives of this Treaty) and art. 293
(negotiations for the abolition of double
taxation) have an obligation to refrain from
measures by which they wilfully organise double
taxation.
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Problems with Legislative Action
4. It is suggested that the legal basis for ECJ decisions
could be reinforced by a resolution from the
European Parliament on the over-all general tax
principles to be observed in the internal market. The
problem in the EU is that only national parliaments
are competent to decide in taxation, but not
competent to decide on the rules for the internal
market, while the European parliament is not
competent to decide in taxation, but is only
competent to make (tax) recommendations for the
internal market. But the two types of parliaments
never meet.
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