DIFFERENT CONCEPTS OF ABUSE AND NATIONAL ANTI-ABUSE LAW

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 WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

Table of Content • Different concepts of abuse at different levels (international, EU, national) • Is there an implied concept of abuse as a principle of intrepretation of EU or international tax law? • 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? WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

Three Different Levels of Abuse • I Abuse at Eu level • II Abuse at the international (non-EU) level • Abuse at national level • Within EU abuse concept at EU level controls all other abuse concepts on cross-border transactions and on national transactions using EU concepts. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

Concepts of Abuse at EU Level • Reference to national anti-abuse measures • Abuse concept in directives • Abuse concept in the case law of the ECJ WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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”. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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 …” WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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”. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. ” WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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 … » WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. ” WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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”. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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” WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. » WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. ” WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. ” WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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). WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

International Case Law on Abuse Bundesgericht (Swi), 28. 11. 2005, Treaty Switzerland – Denmark IBFD nr. 2 A. 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. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. 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. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD

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. WWW. IBFD. ORG, Your Portal to Cross-Border Tax Expertise © 2007 IBFD