GAAR v. SAAR or both? - International Tax Compact – ITC September 2012, Kuala Lumpur ANTI-AVOIDANCE RULES IN TAXATION: STRIKING A BALANCE GAAR v. SAAR – or both? Prof. Dr. Stef

4-5 September 2012, Kuala Lumpur ANTI-AVOIDANCE RULES IN TAXATION: STRIKING A BALANCE

GAAR v. SAAR – or both?

Prof. Dr. Stef van Weeghel


GAAR and SAAR

GAAR: General anti-avoidance rule

Statutory

Judicial

SAAR: Specific anti-avoidance rule

Statutory

GAAR v SAAR - or both? 2


Overview of the main issues

Need for GAARs and SAARs

Policy considerations

Tax avoidance and evasion

GAARs and SAARs

GAAR v SAAR

Tax treaties and domestic GAARs and SAARs

Abuse of tax treaties




“The avoidance of taxes is the only intellectual pursuit that carries

any reward.”

John Maynard Keynes (1883 - 1946)

“Any one may so arrange his affairs that his taxes shall be as low

as possible; he is not bound to choose that pattern which will best

pay the Treasury; there is not even a patriotic duty to increase

one's taxes."

Judge Learned Hand, Helvering v.

Gregory, 69 F.2d 809, 810-11 (2d

Cir. 1934).




Acceptable tax avoidance?

Excise tax on tobacco?

Marketed tax shelter

It all starts with a solid system

Dividend turned into capital gain

Compensation turned into capital gain




“[A] basic approach to the tax avoidance problem should be to

construct the tax system as logically as possible. (...); a general

anti-avoidance rule should be a remedy of last resort.”

Zimmer, Form and substance in tax

law,Cahier de droit fiscal

international, Vol. LXXXVIIa, p. 63




No matter how solid the system, there will be tax avoidance

opportunities

Sometimes these opportunities are the result of a deliberate

act of the government.

And the legislator cannot anticipate all avoidance possibilities




Freedom to arrange affairs tax efficiently

Legal certainty

Simplicity

Foreign direct investment and debt markets

vs.

Equity

Credibility

Revenue




Local policy considerations

Information and exchange of information

Disclosure rules

Attitude and discretionary powers revenue authorities

Threshold issues, protection of the taxpayer

Role of the judiciary



Tax avoidance and tax evasion

“The difference between tax avoidance and tax evasion is the

thickness of a prison wall.”

Denis Healey, former UK

Chancellor of the

Exchequer; reported in The

Economist, Volume 354, Issues

8152-8163 (2000), p. 186.



GAARs and SAARs

Interpretation and GAAR

Sham, simulation, substance over form

Characterisation, possibly for tax purposes only (example:

a loan is characterized as equity)

Extensive interpretation

Recharacterisation/fraus legis



GAARs and SAARs

SAARs

Domestic

Anti-deferral

Interest deduction limitation

Character of income

Etc.



GAARs and SAARs

SAARs

International

Transfer of residence

Base companies

Base erosion

Character of income



GAAR v SAAR

GAAR

General safeguard

Uncertainty

SAAR

Effective

Complexity



GAAR v SAAR

Best is probably to have both

But need for SAAR is dependent on tax system and policy

(one rate or different rates, capital export or import neutrality,

need to raise foreign capital, etc.)

And compatibility with tax treaty obligations is an issue



GAAR and tax treaties

Application of general anti-avoidance rules can generally

be reconciled with tax treaty obligations

Statements made by OECD in 2003-changes are

generally valid

Significant exceptions exist



SAAR and tax treaties

Application of specific anti-avoidance rules can

sometimes but certainly not generally be reconciled with

tax treaty obligations

CFC

Thin-cap

Recharacterisation

Fictions

Etc.



GAAR and tax treaties

"[T]o the extent these anti-avoidance rules are part of the

basic domestic rules set by domestic tax laws for determining

which facts give rise to a tax liability, they are not addressed in

tax treaties and are therefore not affected by them. Thus, as a

general rule, there will be no conflict between such rules and

the provisions of tax conventions."

OECD MC Commentary

Article 1, §9.1/§22.1



SAAR and tax treaties

“[W]hilst some countries have felt it useful to expressly clarify,

in their conventions, that controlled foreign companies

legislation did not conflict with the Convention, such

clarification is not necessary. It is recognised that controlled

foreign companies legislation (...) is not contrary to the

provisions of the Convention."

OECD MC Commentary

Article 1, §23



SAAR and tax treaties – CFC

Domestic CFC-legislation, two legislative techniques:

Look-through-approach (attribution of undistributed profits

of the subsidiary to the shareholder)

Deemed dividend approach

Two approaches in scope:

Low-tax jurisdictions

Tainted income



SAAR and tax treaties - CFC

Three approaches by domestic judiciary in assessing tax

treaty compatibility:

Conflict with Article 7 (France and Brazil)

Out of scope tax treaty (Japan / Finland / UK)

Potential conflict, but treaty override permitted (Sweden)



22


X Ltd State A

State B Y Ltd

1111 State C Z Ltd

There is no tax treaty between

State A and State C

State A company incorporates

and funds a company (Y Ltd) in

State B that acquires the State C

shareholding.

Tax treaty between between B

and C: capital gains taxable only

in the State B; limited dividend

taxation and no interest taxation

in state C

GAAR v SAAR - or both?


Abuse of tax treaties – Capital gains

Azadi Bachao Andolan (India)

Tax planning is legitimate within legal framework

Duke-of-Westminster-doctrine (UK, 1936) still prevails

Treaty shopping is not per se illegal or unethical

MIL Investements (Canada)

Obiter: nothing inherently improper with selecting one

foreign regime over another



Abuse of tax treaties - Dividends

A Holding (Switzerland) vs. BNB 1994/253 (The Netherlands)

+ Prévost (Canada)

Dividends

Treaty benefits denied based on abuse (inherent anti-

abuse)

Treaty shopping is ok

Intermediate holding is beneficial owner (BO)



Abuse of tax treaties - Interest

Indofood vs. Transportasi Gas (Indonesia)

Hypothetical conduit is not BO

Dutchco is BO

Aiken Industries vs. NIPSCO (U.S.)

No dominion and control

Recognizable business




Legitimacy of treaty shopping

Application of domestic rules

Treaty interpretation

Inherent anti-abuse rule in tax treaties?

Beneficial ownership



Legitimacy of treaty shopping

Improper and contrary to

purposes of treaties

Breaches reciprocity of a

treaty and alters the balance

of concessions

Contrary to principle of

economic allegiance

Disincentive for countries to

negotiate

Creates undesired revenue

losses

Not all structures are artificial

and devoid of substance

Some concessions are

unilateral – “negotiated”

balance not necessarily fair

Experts do not agree on

nexus required

Valid (easier to achieve

reciprocity + cooperation)

No evidence, but probably

true



Application of domestic rules

“[T]axes are ultimately imposed through the provisions of

domestic law as restricted (…) by the provisions of tax

conventions. Thus, any abuse of the provisions of a tax

convention could also be characterized as an abuse of the

provisions of domestic law under which tax will be levied. For

these States the issue then becomes whether the provision of

tax conventions may prevent the application of the anti-abuse

provisions of domestic law (…)“

OECD MC Commentary

Article 1, §9.2



Treaty interpretation

"Other states prefer to view some abuse as being abuses of

the convention itself, as opposed to abuses of domestic law.

These states then consider that a proper construction of tax

conventions allows them to disregard abusive transactions,

such as those entered into with the view to obtaining

unintended benefits under the provisions of these conventions.

This interpretation results from the object and purpose of tax

conventions as well as the obligation to interpret them in good

faith (see Article 31 VCLT).“

OECD MC Commentary

Article 1, §9.3




"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 purpose of the relevant provisions.“

OECD MC Commentary

Article 1, §9.5



UN MC Commentary

Same "guiding principle" on abuse as OECD

Improved certainty for taxpayer

Objective determination of taxpayer’s main purpose to obtain

tax advantages

OECD MC Commentary Art. 1, §9.5

UN MC Commentary Art. 1, §23-25:

Excludes "treaty abuse by State", e.g. preferential regimes

Limited support for broad beneficial ownership provision



Inherent anti-abuse rule in tax treaties?

Art. 26 and 31 VCLT (Can treaty benefits be denied based on

good-faith-application / interpretation?)

ICJ dissenting opinion Judge Alvarez

Vogel & Ward

Case law:

Present: A Holdings and Yanko Weiss,

Not present: MIL and Dutch Supreme Court (various cases)




Introduced in 1977 OECD Model Convention and Commentary

Term is not defined in Model

France and Switzerland: even absent BO concept in treaty,

BO still a requirement for source State reduction

Mixed picture: to be defined in domestic law OR autonomous /

international meaning?

Government view in The Netherlands and U.S.: leeway

through Art. 3(2) for interpretation with reference to domestic

law

Indofood: international fiscal meaning (OECD MC

Commentary)




Mixed picture: to be defined in domestic law OR autonomous /

international meaning?

Prévost: unclear whether contextual, international fiscal or

domestic meaning (reference though to interpretation under

other State’s law)

Transportasi Gas (Indonesia, 2008): international fiscal

meaning to be determined by the State of residence,

exchange of information between States

China: Notice 601 – negative elements (business activities,

assets, employees, subject-to-tax, back-to-back)




OECD discussion draft

Contextual meaning

But domestic meaning applicable if consistent

Full right to use and enjoy

But separate abuse test

Beneficial owner is not ultimate owner for kyc-rules



Final remarks

Solid legislation

GAAR and SAAR

Information

Administration

Judiciary

When in doubt identify SAAR in tax treaty

Limit scope of beneficial ownership

Include limitation on benefits clauses

Find right balance and be reliable and consistent



Thank you for your attention.


Documents

GAAR v. SAAR or both? - International Tax Compact – ITC September 2012, Kuala Lumpur ANTI-AVOIDANCE RULES IN TAXATION: STRIKING A BALANCE GAAR v. SAAR – or both? Prof. Dr. Stef