GAARs - A Key Element of Tax Systems in the Post-BEPS World

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3 GAARs - A Key Element of Tax Systems in the Post-BEPS World Why this book? General anti-avoidance rules (GAARs) have been a topic of great relevance in practice as well as in academia for decades. In a post-beps tax world, with national legislators introducing or tightening GAARs, and with the European Union and OECD suggesting implementation of such rules, the topic seems more important than ever. The aim of this book is to give tax policymakers, tax authorities, tax courts and tax practitioners an idea of the various understandings of and approaches towards tax avoidance in 39 countries. In order to do so, 39 national reports from countries across the globe have been compiled and are published in this volume. More than 100 experts, including the authors of the national reports, convened for a joint conference on General Anti-Avoidance Rules (GAARs) A Key Element of Tax Systems in the Post-BEPS Tax World? in Rust (Austria) from 3-5 July The national reports focus on the requirements for the application of the GAARs and on the legal consequences of applying a GAAR. Moreover, the relationship between GAARs and SAARs, as well as tax treaties and EU law requirements, are given much attention. A further objective of this book is to shed light on recent European developments and on alternatives to GAARs. Title: GAARs - A Key Element of Tax Systems in the Post-BEPS World Author(s): Michael Lang / Jeffrey Owens / Pasquale Pistone / Alexander Rust / Josef Schuch / Claus Staringer Date of publication: April/May 2016 ISBN: (print/online), (ebook) Type of publication: Print, Online and ebook Number of pages: 840 pp. Terms: Shipping fees apply. Shipping information is available on our website Price (Print/online): EUR 150 / USD 180 (VAT excl.) Price (ebook): EUR 120 / USD 144 (VAT excl.) Order information To order the book, please visit You can purchase a copy of the book by means of your credit card, or on the basis of an invoice. Our books encompass a wide variety of topics, and are available in one or more of the following formats: IBFD Print books IBFD ebooks downloadable on a variety of electronic devices IBFD Online books accessible online through the IBFD Tax Research Platform IBFD, Your Portal to Cross-Border Tax Expertise

4 IBFD Visitors address: Rietlandpark DW Amsterdam The Netherlands Postal address: P.O. Box HE Amsterdam The Netherlands Telephone: Fax: IBFD All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the written prior permission of the publisher. Applications for permission to reproduce all or part of this publication should be directed to: permissions@ibfd.org. Disclaimer This publication has been carefully compiled by IBFD and/or its author, but no representation is made or warranty given (either express or implied) as to the completeness or accuracy of the information it contains. IBFD and/or the author are not liable for the information in this publication or any decision or consequence based on the use of it. IBFD and/or the author will not be liable for any direct or consequential damages arising from the use of the information contained in this publication. However, IBFD will be liable for damages that are the result of an intentional act (opzet) or gross negligence (grove schuld) on IBFD s part. In no event shall IBFD s total liability exceed the price of the ordered product. The information contained in this publication is not intended to be an advice on any particular matter. No subscriber or other reader should act on the basis of any matter contained in this publication without considering appropriate professional advice. Where photocopying of parts of this publication is permitted under article 16B of the 1912 Copyright Act jo. the Decree of 20 June 1974, Stb. 351, as amended by the Decree of 23 August 1985, Stb. 471, and article 17 of the 1912 Copyright Act, legally due fees must be paid to Stichting Reprorecht (P.O. Box 882, 1180 AW Amstelveen). Where the use of parts of this publication for the purpose of anthologies, readers and other compilations (article 16 of the 1912 Copyright Act) is concerned, one should address the publisher. ISBN (print) ISBN (ebook) ISSN NUR 826

5 Table of of Contents Foreword xxxiii Chapter 1: General Report: GAARs 1 Richard Krever 1.1. Introduction Models When is the GAAR used? Taxpayer s purpose Counterfactual Abuse of the anti-abuse rule GAARs and SAARs GAARs and tax treaties GAARs and EU law Alternatives to a GAAR Looking forward 20 Chapter 2: European Union 21 Ioanna Mitroyanni 2.1. Introduction Requirements for applying the GAAR The ATP Rec Objective element Subjective element Taxes subject to the GAAR Limits to the concept of a GAAR Burden of proof 28 v

6 Table of Contents 2.3. Legal consequences of applying a GAAR GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties EU law and tax treaties as international agreements Interface between GAARs and tax treaties Closing observations GAARS and EU law requirements Can the GAAR be tested against the freedoms? The case law of the ECJ Introduction The concept of tax abuse GAARs and recent European developments 42 Chapter 3: Australia 45 Richard Krever and Peter Mellor 3.1. GAARs An emerging trend in the tax landscape Introduction Australia s early rules dealing with BEPS Australia s recent GAAR rules dealing with BEPS Requirements for the application of GAARs Elements of the GAAR Elections and options The GAAR panel Consequences of applying GAARs Cancellation of the tax benefit Penalties GAARs and SAARs (specific anti-avoidance rules) Defining SAARs GAARs and tax treaties GAARs and EU law requirements 61 vi

7 Table of Contents 3.7. GAARs and recent European developments Alternatives to GAARs 61 Chapter 4: Austria 65 Viktoria Wöhrer 4.1. GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARs and EU law requirements GAARs and recent European developments Alternatives to GAARs 80 Chapter 5: Belgium 83 Marc Bourgeois and Aymeric Nollet 5.1. GAARs An emerging trend in the tax landscape The principle of the legality of tax and the free choice of the least taxed way in the Belgian legal order The former GAARs in the Belgian legal order The new GAARs in the Belgian legal order Requirements for the application of GAARs The scope of the non-enforceability rule The objective and subjective elements of the concept of tax abuse The burden of proof The entry into force of the new GAARs The circular letters of the tax administration Legal consequences of applying GAARs 96 vii

8 Table of Contents The tax authorities power to recharacterize the taxpayer s legal acts The Constitutional Court s decision on the new GAARs Advance rulings? GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARs and EU law requirements GAARs and recent European developments Alternatives to GAARs 105 Chapter 6: Brazil 109 Luís Eduardo Schoueri and Mateus Calicchio Barbosa 6.1. GAARs An emerging trend in the tax landscape The previous formalist approach Legislative moves towards a GAAR An awkward first step: The inaccuracy of Complementary Law no. 104/ The subsequent stumble: The rejection of Provisional Measure no. 66/ Winds from the BEPS Plan: Mandatory disclosure of tax planning Giving up formal legality: The CARF s recent approach to tax planning The misuse of the sham doctrine as a facade for the business purpose approach No more sham: The Lupatech case Problems of giving up legality Legal certainty and retroactivity Equality and legal reasoning Requirements for the application of GAARs Selected issues decided by the CARF Legal consequences of applying GAARs 130 viii

9 Table of Contents 6.4. GAARs and SAARs (specific anti-avoidance rules) Brazilian transfer pricing legislation: A compromise for practicability Brazilian thin capitalization rules: An unnecessary movement Transfer pricing and thin capitalization: Harmonious coexistence Brazilian CFC rules: A SAAR? GAARs and tax treaties SAARs in the Brazilian treaty framework: A growing trend The Eagle II case: Tax treaties not a lifeline for abusive stratagems GAARs and EU law requirements GAARs and recent European developments Alternatives to GAARS 144 Chapter 7: Canada 147 Martha O Brien 7.1. GAARs An emerging trend in the tax landscape Introduction Reasons for adopting the GAAR Canada s GAAR and the BEPS project Canadian law of tax avoidance and abuse of right GAARs and indirect taxation Requirements for application of GAARs Introduction Tax benefit Avoidance transaction Series of transactions Abuse or misuse GAAR statistics Constitutionality of the GAAR Advance disclosure of aggressive avoidance transactions 160 ix

10 Table of Contents 7.3. Legal consequences of applying GAARs Denial of the tax benefit The GAAR Committee GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties General GAARs and provincial taxes: A model for an international GAAR? The Québec shuffle and the strict view of abuse Ontario Fincos and Alberta s approach to tax avoidance GAARS and EU law requirements GAARs and recent European developments Alternatives to GAARS 176 Chapter 8: China 179 Bristar Mingxing Cao and Na Li 8.1. GAARs An emerging trend in the tax landscape Overview Legislative structure of the GAAR The concept of tax avoidance Legislative background and debate Tax evasion, tax avoidance and tax mitigation Textualism? Influence of international organizations and other countries Interaction with other non-taxation measures Laws similar to the GAAR in other areas Requirements for the application of GAARs Elements of the application of the GAAR Example of application of the GAAR Reporting obligation of non-residents for offshore shares transfer Application of the GAAR beyond the CIT Law 194 x

11 Table of Contents 8.3. Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) SAARs in China Transfer pricing regime CFC regime Thin capitalization regime GAARs and tax treaties Relationship between the GAAR and tax treaties Application of the GAAR to counter treaty shopping GAARS and EU law requirements GAARS and recent European developments Alternatives to GAARs Substance over form principle Certainty of GAAR application GAAR Procedure Rule 202 Chapter 9: Croatia 205 Nataša Žunić Kovačević, Stjepan Gadžo, Sabina Hodžić and Irena Klemenčić 9.1. GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARs and EU law requirements GAARS and recent European developments Alternatives to GAARs 217 xi

12 Table of Contents Chapter 10: Czech Republic 219 Danuše Nerudová and Lukáš Moravec GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARs and EU law requirements GAARs and recent European developments Alternatives to GAARs 231 Chapter 11: Denmark 237 Søren Friis Hansen GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARs and EU law requirements GAARs and recent European developments Alternatives to GAARs 245 xii

13 Table of Contents Chapter 12: Finland 247 Marjaana Helminen GAARs An emerging trend in the tax landscape Requirements for the application of GAARs The provision Typical situations in which the GAAR is applied Tax avoidance purpose Reasons other than tax reasons Rule of law principle International aspects Legal consequences of applying GAARs Tax consequences Advance rulings GAARs and SAARs (specific anti-avoidance rules) SAARs under Finnish tax law Methods for the elimination of double taxation Relation between SAARs and GAARs GAARs and tax treaties When can domestic GAARs be applied in tax treaty situations? Case law GAARs and EU law requirements Relevance of the TFEU freedoms Tax avoidance as a justification for restricting the TFEU freedoms Directives Other than artificial arrangements Relations with third countries May the application of the Finnish domestic GAAR restrict the TFEU Freedoms? GAARs and recent European developments Alternatives to GAARs 273 xiii

14 Table of Contents Chapter 13: France 275 Thomas Dubut GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs (special anti-avoidance rules) GAARs and tax treaties GAARS and EU law requirements GAARS and recent European developments Alternatives to GAARs 285 Chapter 14: Germany 287 Klaus-Dieter Drüen GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Abuse of tax law Construction leading to a tax benefit Intention of abuse Reduction of taxes Burden of proof First step: Argumentation regarding abuse by the tax administration Second step: Invalidation by the taxpayer Relevance of non-tax motives Domestic examples of situations in which GAARs must be applied Legal consequences of applying GAARs GAARs and SAARs Sequence tests First step 298 xiv

15 Table of Contents Second step Restrictive effect, where the single prerequisites of the corresponding SAAR are not fulfilled GAARs and tax treaties Relationship between GAARs and tax treaties Debate among scholars and judicial opinions Examples of the treatment of coexisting GAARs and tax treaties in Germany Basis for negotiation for agreements for the avoidance of double taxation Prevention of abuse of tax treaties by GAARs and SAARs Treaty shopping GAARs and EU law requirements EU law requirements Consequences for the application of the domestic GAAR GAARs and recent European developments Alternatives to GAARs 305 Chapter 15: Hungary 307 Borbála Kolozs and Richard Krever GAARs An emerging trend in the tax landscape The meaning of tax avoidance in Hungary The history of the Hungarian GAARs Application of the GAARs The form and substance GAAR The proper use of rights GAAR Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARs and EU law requirements 318 xv

16 Table of Contents GAARs and recent European developments Alternatives to GAARs 320 Chapter 16: India 321 Nilesh M. Kapadia GAARs An emerging trend in the tax landscape Requirements for application of the GAAR Requirements Onus on the assessing officer Safeguard Constitutionality Clarifying examples on where the GAAR should apply Legal consequences of applying a GAAR GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARs and EU law GAARs and recent European developments Alternatives to GAARs 340 Chapter 17: Ireland 345 Gerardine Doyle and Emer Hunt GAARs An emerging trend in the tax landscape The Irish GAAR History of the Irish GAAR Irish GAAR challenges tax avoidance transactions Requirements for the application of GAARs Requirements Activity by Revenue Commissioners under the Irish GAAR 352 xvi

17 Table of Contents Irish GAAR supplemented by Mandatory Disclosure Regime Legal consequences of applying the GAAR Legal consequences Mechanics of the Irish GAAR Revenue s discretion as to recharacterization of the transaction Judicial consideration of the GAAR Uncertainties unresolved by the judgment GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARs and EU legal requirements GAARs and recent European developments Alternatives to GAARs 365 Chapter 18: Italy 369 Paolo Piantavigna GAARs An emerging trend in the tax landscape Requirements for the application of GAARs The teleological element The objective element The subjective element Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARs and EU law requirements GAARs and recent European developments Alternatives to GAARs 392 xvii

18 Table of Contents Chapter 19: Liechtenstein 397 Martin Wenz, Patrick Knörzer and Simon Busch GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) SAAR on adequate salary of managing shareholders SAAR on restructurings SAAR on write-downs and value adjustments of shares SAAR on low-interest shareholder loans Summary GAARs and tax treaties GAARs and EU law requirements GAARs and recent European developments Alternatives to GAARs 409 Chapter 20: Mexico 411 Daniel Fuentes Hernández and César Alejandro Ruiz Jiménez GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARS and EU law requirements 431 xviii

19 Table of Contents GAARS and recent European developments Alternatives to GAARs 431 Chapter 21: Netherlands 435 Sigrid Hemels GAARs An emerging trend in the tax landscape The Netherlands statutory GAAR Fraus legis Impact of BEPS on Netherlands GAARs Requirements for the application of GAARs Requirements for applying fraus legis Taxes to which fraus legis can be applied Application in the case of an arrangement known to be available Application of GAARs in practice Burden of proof GAARs and the legality principle Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARS and EU law requirements GAARS and recent European developments Alternatives to GAARs 455 Chapter 22: New Zealand 457 Craig Elliffe and Andrew Smith GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Introduction Income tax GAAR Section BG 1 of the ITA GST (VAT) GAAR Section 76 of the GSTA xix

20 Table of Contents Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARS and EU law requirements GAARS and recent European developments Alternatives to GAARs 470 Chapter 23: Norway 473 Ingebjørg Vamråk GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARS and EU law requirements GAARS and recent European developments Alternatives to GAARs 483 Chapter 24: Poland 485 Hanna Filipczyk and Agnieszka Olesińska GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties 497 xx

21 Table of Contents GAARs and EU law requirements GAARs and recent European developments Alternatives to GAARs 507 Chapter 25: Portugal 515 Gustavo Lopes Courinha GAARs An emerging trend in the tax landscape Overview The need for (predictable) tools to counter tax avoidance The introduction of a GAAR and the view of the legal system as a whole Requirements for the application of GAARs The elements of the GAAR The use of the GAAR and the role of the legislature Elements of the GAAR as interpreted by the courts The result element The tax advantage The means element The abuse of legal forms The intellectual element The tax motivation The normative-systematic element Existence of fraus legis Legal consequences of applying GAARs Mere tax effects Rulings and the use of the GAAR GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARs and EU law requirements GAARs and recent EU developments Alternatives to GAARs Overview The use of the GAAR The past and perspectives The economic interpretation 531 xxi

22 Table of Contents Chapter 26: Romania 533 Madalina Cotrut GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARS and EU law requirements GAARS and recent European developments Alternatives to GAARs 541 Chapter 27: Russia 543 Vladimir Tyutyuryukov GAARs An emerging trend in the tax landscape GAARs in the Russian legal environment Tax avoidance, tax evasion and non-tax regulations Public morality as a GAAR? Requirements for the application of GAARs Legal background Burden of proof Disclosing tax planning? Statistics Legal consequences of applying GAARs General consequences GAAR application some evidence from court practice GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties 559 xxii

23 Table of Contents GAARs and EU law requirements GAARs and recent European developments Alternatives to GAARs 564 Chapter 28: Serbia 569 Svetislav Kostic GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARs and EU law requirements GAARS and recent European developments Alternatives to GAARs 580 Chapter 29: Slovak Republic 583 Lubica Adame GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs Judgments of the Supreme Court of the Slovak Republic Tax rulings GAARs and SAARs (specific anti-avoidance rules) CFC rules and thin capitalization rules Loss carry-forward limitation Transfer pricing Payments for services to non-treaty jurisdictions 590 xxiii

24 Table of Contents Limitation of benefits Beneficial ownership Look-through approach GAARs and tax treaties The Supreme Court s view of treaty shopping GAARs and EU law requirements GAARs and recent European developments Alternatives to GAARs 595 Chapter 30: Slovenia 597 Lidija Hauptman and Sabina Taškar Beloglavec GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARS and EU law requirements GAARS and recent European developments Alternatives to GAARs 609 Chapter 31: South Africa 611 Annet Wanyana Oguttu GAARs An emerging trend in the tax landscape The previous GAAR and why it was repealed Requirements for the application of GAARs There must be an arrangement Arrangement must constitute an avoidance arrangement 614 xxiv

25 Table of Contents Sole or main purpose to obtain a tax benefit Avoidance arrangement constitutes an impermissible avoidance arrangement In the context of business In a context other than business In any other context Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARs and EU law requirements GAARS and recent European developments Alternatives to GAARS Common law doctrine as an alternative Recommendations and concluding remarks 632 Chapter 32: South Korea 633 Hyejung Byun and Soo Jean Park GAARs An emerging trend in the tax landscape Do GAARs exist in Korea? Sham transaction doctrine in the Civil Act Introduction of GAARs? Influence of the international debate Requirements for the application of GAARs Requirements for the application of a GAAR: General Scope of GAARs Situations in which GAARs are applicable Application of GAARs in case law Applicable to double non-taxation? Applicable to tax advantages provided on purpose? Relationship between GAARs and the Constitution Legal consequences of applying GAARs Legal consequences of applying the current rules Relationship between GAARs and rulings 644 xxv

26 Table of Contents GAARs and SAARs (specific anti-avoidance provisions) SAARs Denial of unreasonable transactions Transfer pricing rules Thin capitalization rules Controlled foreign company rules SAARs in tax treaties GAARs and tax treaties GAARs and EU law requirements GAARs and recent European developments Alternatives to GAARs 652 Chapter 33: Spain 655 Juan José Zornoza and Andrés Báez GAARs An emerging trend in the tax landscape Requirements for the application of GAARs The scope of the GAAR The legal requirements of the GAAR The existence of a tax saving A tax saving obtained through artificial or improper arrangements The infrequency or non-usual character of an arrangement is excluded from the concept of artificiality The meaning of clearly artificial or improper The burden of proof in the Spanish GAAR Legal consequences of applying the GAAR GAARs and SAARs GAARs and tax treaties GAARS and EU law requirements 675 xxvi

27 Table of Contents GAARS and recent European developments (CCCTB, recommendation of the Commission) Alternatives to GAARs 679 Chapter 34: Sweden 683 Stefan Olsson GAARs An emerging trend in the tax landscape Introduction Requirements for the application of GAARs Introduction Which taxes are subject to the GAAR? Requirements for the current GAAR Legal consequences of applying GAARs GAARs and SAARs (special anti-avoidance rules) GAARs and tax treaties GAARS and EU law requirements GAARS and recent European developments (CCCTB, recommendation of the Commission) Alternatives to GAARs 698 Chapter 35: Switzerland 701 Peter Hongler GAARs an emerging trend in the tax landscape The Swiss GAAR between tax avoidance and tax planning Development of the GAAR Blumenstein and the German origin of the Swiss GAAR The subsequent discourse in the literature The tax avoidance doctrine in Article 21 of the WHTA The tax avoidance doctrine in certain cantonal income tax acts 705 xxvii

28 Table of Contents The future of the GAAR The importance of the GAAR in practice The GAAR and tax rulings Requirements for the application of GAARs Requirements In general Unusual/inadequate (insolite) structure Actual tax savings Intention to save taxes Areas of application of the tax avoidance doctrine In general Income tax Gift and inheritance taxes Issuance stamp duty Real estate capital gains tax and real estate transfer tax VAT Legal consequences of applying GAARs In general Examples Triangular gift International transposition VAT airplane cases GAARs and SAARs Preliminary remarks SAARs with an explicit legal basis Transposition The Swiss thin cap rule SAARs without a legal basis Old reserve doctrine (Altreservenpraxis) Interaction between a written SAAR and an unwritten SAAR Transfer of shell companies Relation between SAARs and tax treaties Transfer of shell companies The old reserve doctrine GAARs and tax treaties Application of the Swiss GAAR in a treaty context Overview 720 xxviii

29 Table of Contents Exception Explicit reservation in a tax treaty? GAARS and EU law requirements GAARS and recent European developments (CCCTB, recommendation of the Commission) Alternatives to GAARs Preliminary remarks Substance-over-form A possible alternative to the GAAR? Are more precise SAARs an alternative to the Swiss GAAR? Are other alternatives to a GAAR feasible? 723 Chapter 36: Turkey 725 Ege Berber Villeneuve GAARs An emerging trend in the tax landscape Requirements of the application of the GAAR Elements of tax veiling Legal form Economic result Abuse of a legal form Intention of abuse Proof Legal Consequences of applying the GAAR GAARS and SAARS The Scope of SAARS Transfer pricing rules Controlled foreign company rules Thin capitalization rules Withholding requirement on payments to low-tax jurisdictions Miscellaneous SAARs GAARs and tax treaties GAARs and EU law requirements 737 xxix

30 Table of Contents GAARs and recent European developments Alternatives to GAARs 737 Chapter 37: United Kingdom 741 Judith Freedman GAARs an emerging trend in the tax landscape Introduction The UK GAAR and the BEPS Action Plan Development of the judicial Ramsay principle into a rule of statutory interpretation Introduction of a statutory GAAR Requirements for the application of GAARs Definitions and the double reasonableness test Rules of evidence, the GAAR Advisory Panel and statutorily recognized guidance Disclosure rules and the GAAR The GAAR as a trigger for other powers and penalties GAAR and the Rule of Law Examples of application of the GAAR Applying GAARs: Process and legal consequences Opinion of the Panel on reasonableness and application of counteraction powers Rulings GAARs and SAARs (Special Anti-Avoidance Rules) GAARs and tax treaties GAARS and European Union law requirements (the Freedoms, directives) GAARS and recent European developments (CCCTB, recommendation of the Commission) Alternatives to GAARs 762 xxx

31 Table of Contents Chapter 38: United States 765 Shay Menuchin and Yariv Brauner GAARs An emerging trend in the tax landscape Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs GAARs and tax treaties GAARs and European Union law requirements GAARs and recent European developments An alternative to GAAR 788 Appendix: Questionnaire GAARs An emerging trend in the tax landscape and in the political debate of many countries Requirements for the application of GAARs Legal consequences of applying GAARs GAARs and SAARs (specific anti-avoidance rules) GAARs and tax treaties GAARs and EU law requirements (the freedoms; directives) GAARS and recent European developments (CCCTB; recommendation of the Commission) Alternatives to GAARs 794 List of Authors 795 xxxi

32 Sample chapter

33 Chapter 1 General Report: GAARs Richard Krever 1.1. Introduction While they are very recent additions to some countries tax laws, GAARs have played a central role in other tax systems for well over a century. 1 Quite possibly no other feature of tax law provides a better insight into a nation s tax psyche than its anti-avoidance rules. The intersection of general antiavoidance rules (GAARs) as well as their ancillary specific anti-avoidance rules (SAARs) with operative provisions of tax law reveals much about all aspects of a country s tax system: citizens tax morale; judicial perspectives on taxation and legal interpretation; drafters inclinations towards technical or principled drafting; and legislators willingness to confront politically sensitive issues or their tendency to delegate the tough decisions to administrators and courts. A comparative analysis of the role of GAARs (or the lack of any GAAR) in tax systems such as that found in this volume can thus offer unique perspectives on tax law across jurisdictions. 2 At the same time, comparative study of GAARs raises challenges rarely encountered in other areas of tax law. While some tax concepts transfer pricing, thin capitalization and permanent establishment, for example have common meanings across jurisdictions and tax systems, even if the details vary at the margins, there appears to be no universal understanding of what constitutes a GAAR or, for that matter, what constitutes tax avoidance, the notional target of a GAAR. At one end of the spectrum, the avoidance label is limited to convoluted and, at best, quasi-legal transactions verging on evasion; 3 at the other, legitimate choices between alternatives yielding different tax outcomes can amount to avoidance in some circumstances. There is an equally wide spectrum of definitions of a GAAR. In most countries, the GAAR takes the form of a statutory rule, albeit with an extremely 1. See, for example, New Zealand, which has had a GAAR for 139 years. 2. This general report analysis refers to chapters in this volume on specific jurisdictions by use of the name of the country covered in the chapter. 3. Russian jurisprudence, for example, merges avoidance and evasion into a single issue; see Russia. 1

34 Chapter 1 - General Report: GAARs large range of constructions. This is not always the case, however. In a jurisdiction lacking a statutory rule, a doctrinal approach based only on judicial interpretation might be considered a GAAR. 4 There is similarly a divergence of views on the merits of, or drawbacks to, reliance on a GAAR as a tool to safeguard the integrity of a tax system. The most commonly cited drawbacks are uncertainty for taxpayers and unfairness resulting from selective application. The two perceived problems are related. Because a GAAR is only applied after the fact, taxpayers cannot make investments predicting particular after-tax rates of return a key expectation essential to the efficient allocation of capital in any market economy as they cannot know with certainty what the tax consequences of their intended actions will be after possible application of a GAAR. 5 For the same reason, the law will apply differently to different taxpayers in the same circumstances. Unlike a substantive tax rule, which sets out general rules for all taxpayers in a particular situation, a GAAR applies to each case separately, and its elements, including the taxpayer s purpose (to the extent this is incorporated into the rule), must be considered separately for each case. 6 Only a portion of the pool of taxpayers who may have entered into similar transactions are subject to audit and only some of those transactions might be identified as transactions to which the GAAR might apply, with the rule applied successfully only to a portion of this subset. Equal application to all taxpayers of a rule that looks at the totality of circumstances in each case including, as it does in most instances, the motives of each particular taxpayer is not possible. Commentators sympathetic to the use of GAARs view these concerns as exaggerated. While they may have some legitimacy prior to the first GAAR cases being heard, proponents of GAARs argue, once the outcomes of attempts to apply the GAAR are known, the rule can act as a supplement to substantive measures by showing how particular types of arrangements are likely to be treated under the rule, inhibiting behaviour similar to that known to be caught. To the extent that the concerns of critics are valid, supporters might further argue, the rule is nevertheless necessary to protect the integrity of the tax law, given the inherent limitations on drafters ability to anticipate every possible alternative transaction open to taxpayers. 7 The 4. See, for example, Norway and Russia. 5. See, for example, Poland. It has been suggested that the latitude afforded tax authorities by a GAAR is fundamentally incompatible with the certainty that Adam Smith saw as a cornerstone of legitimate taxation; see Ireland. 6. See Germany. 7. See Finland. 2

35 Models most realistic of supporters concede that there is inherent uncertainty arising from a GAAR but argue that this is a price that has to be paid in the interest of the larger goal of protecting the integrity of the tax base. Whatever their merits or flaws, there is no doubt that the lack of precise borders in a GAAR transfers great power and responsibility to the adjudicators. Supporters of a GAAR have to hope that the judges will exercise those powers, in the words of a minister who oversaw the introduction of a GAAR in the Netherlands, as good men. 8 While GAARs have proliferated in modern times, they are not universal and proposals to introduce GAARs sometimes flounder in the face of resolute opposition, including that of the legislature. 9 Jurisdictions reluctant to adopt GAARs delegate to the courts the task of identifying cases where the taxpayer s characterization of transactions could or should be rejected 10 or rely on specific legislative responses where the courts decline to look beyond legal form even where transactions were carried out in a particular form with the clear objective of tax avoidance. 11 In the rarest cases, there is no effective remedy in the absence of a GAAR. 12 Somewhat ironically, the absence of a GAAR in a jurisdiction may be interpreted by courts as a sign that the legislature is willing to tolerate avoidance when other jurisdictions with similar legal backgrounds have adopted GAARs. In these cases, it may be an implicit judicial invitation that prompts enactment of a GAAR. 13 Also, ironically, adoption of a GAAR may have the opposite effect: there is a risk that adoption of a statutory GAAR will inhibit courts from adopting more robust interpretation doctrines to reduce opportunities for avoidance on the assumption that the legislature has fully occupied the anti-avoidance field Models While the forms of GAARs vary widely, they generally fall into four groups. 8. See the Netherlands. 9. See, for example, Mexico and, initially, the United Kingdom (the UK position has since reversed, and a GAAR was adopted in 2013). 10. See, for example, Brazil. Croatia has an economic substance provision, but some argue this does not amount to a GAAR. 11. See, for example, Denmark. 12. See, for example, Mexico. 13. See, for example, Ireland. 14. See Australia. 3

36 Chapter 1 - General Report: GAARs One group, the acts and benefits group, comprises rules that allow the tax authorities to identify a transaction or series of transactions that had the purpose or (more rarely) effect of providing a tax benefit and then recompute the taxpayer s liability on the basis of a hypothetical transaction that the tax authorities surmise would have been the one used had the taxpayer not followed the tax-effective path it did. GAARs in this group look at acts carried out and benefits realized, without the need to identify an economic substance. 15 A second group, usually with a statutory base but on occasion derived solely from judicial practice, 16 sets out rules that mandate an interpretation and application of tax law to the economic substance of a transaction (or series of transactions) rather than the legal form. 17 The rule will normally allow the tax authorities to reassess the taxpayer on the basis of a hypothetical legal transaction that better reflects the underlying economic substance. While almost all jurisdictions with a statutory substance over form rule regard the rule as a GAAR, 18 this characterization of the rule is not universal. 19 Nor is the view that a judicial substance over form rule (or variations such as the true import of an arrangement) amounts to a GAAR. 20 A possible third model, it is argued by some, is a judicial GAAR based on the adoption by the courts of a broad abuse of law doctrine. 21 A fourth model is a statutory abuse of law model that applies where a taxpayer adopts a fictitious arrangement or one that is valid in law but used to defeat the intention of the tax legislation. 22 Whether a GAAR takes the form of the classic tax benefit identification rule or an economic substance or abuse of law rule, it can only be effective if it allows a reassessment on the basis of a hypothetical alternative transaction different from the legal form chosen by the taxpayer to minimize tax. In 15. The acts and benefits GAARs are mostly found in Anglo jurisdictions such as Australia, Canada, India, New Zealand, South Africa and the United Kingdom, although some other GAARs, including China s and the current (but not the proposed replacement) Italian GAAR, also satisfy this definition. 16. In one case, the judicial substance over form test was subsequently codified; see United States. 17. In the case of Turkey, this is labelled the real substance; see Turkey. 18. See, for example, Switzerland. 19. See, for example, the debate in Korea. 20. See, for example, Sweden, where the true import alternative is considered quite distinct from the GAAR. 21. See, for example, the Czech Republic. 22. See, for example, France. 4

37 When is the GAAR used? the case of an explicit reconstruction rule, the tax authorities are allowed to substitute an appropriate arrangement for the one used by the taxpayer. An economic substance rule, in contrast, opens the door to assessment on the basis of applying the tax law directly but interpreting the circumstances to fit into the law. The difference between the two can be illustrated with the example of a taxpayer entering into a complex set of arrangements to avoid a loan having the form of a debt. Under the explicit reconstruction rule, the tax authorities would be allowed to substitute a fictional transaction (a direct loan) for the arrangements used by the taxpayer. Under the economic substance approach, the tax authorities can look at the totality of the arrangements and find that there actually is a loan, albeit by a somewhat complex route, and apply the tax law for debt directly. Commonly, the power of the tax authorities to reassess on the basis of an alternative hypothetical transaction is clear, whether it is based on an explicit or an implicit construction of the GAAR. In some rarer cases, however, there is debate over how the GAAR operates in this respect When is the GAAR used? While GAARs differ significantly in form and language, there are some remarkable similarities between the types of cases in which tax authorities have sought (not always successfully) to invoke the GAAR. These appear to fall into three broad categories. The most common situation is where the tax law offers, on its face, alternative tax outcomes depending on the form or structure of a transaction, and taxpayers have arranged affairs to enjoy the reduced (or nil) taxation available with one alternative rather than adopt the version, preferred by the tax authorities, that would incur a higher tax liability. These are not cases where the law offers a concession and the taxpayer has, in response to the government subsidy for targeted activities, invested or acted as the government sought. Nor are they cases where the law provides a tax advantage to achieve a tax policy outcome such as avoiding double taxation 24 or features structural asymmetries such as providing lower capital gains tax rates for taxpayers who hold assets for longer periods or providing different tax rates 23. For example, in Austria, one school of thought sees the GAAR as having an independent reconstruction power, while another sees it as authorizing interpretation on the basis of an economic substance approach. 24. See, for example, Norway. 5

38 Chapter 1 - General Report: GAARs for taxpayers who choose to operate through different types of companies. 25 Rather, they are cases where a taxpayer changes the form of a transaction to shift from one tax rule to another. To achieve the shift, the taxpayer often substitutes a multi-step and multiparty arrangement for the simple transaction that attracts a higher tax burden. For example, rather than lend money directly to a borrower, a lender might interpose a company and convert what would have been taxable interest paid to the lender into tax-free inter-corporate dividends from the interposed company. 26 Similarly, rather than buy immovable property or shares directly, a taxpayer may use an intermediary company to acquire the property or shares and sell interests in the intermediary company rather than the underlying assets if capital gains on the sale of interests in an intermediary company fall outside the scope of the tax law. 27 Other examples include the interposition of entities between a service provider and clients so the income can be diverted to related individuals facing lower marginal tax rates, 28 the use of an interposed entity to avoid social security taxes otherwise payable in respect of employees 29 and the creation of an interposed entity between partners and clients to provide a vehicle for distribution of tax-free benefits (by way of interest-free loans) to the former partners. 30 A further example is the creation of intellectual property, such as a copyright, to convert remuneration for personal labour services to property rights that can then be transferred to an interposed entity so the income it generates is diverted to related persons in lower tax brackets. 31 In the second group of tax avoidance cases to which a GAAR is sometimes applied, the taxpayer seeks to shift a transaction from one tax rule to another not by establishing alternative structures and arrangements but simply by relabelling a transaction in a different form. For example, if lower tax liabilities apply when a person providing labour services is a contractor than if the person is an employee, the parties might agree to substitute a contract calling the person an independent contractor rather than an employee, without any change to the actual working conditions. 32 Similarly, an investor may fund a company by way of what is described on paper as debt but which is in fact equity with a variable interest rate that is actually based on the profits 25. See, for example, Portugal. 26. See, for example, Canada and Portugal. 27. See, for example, China and Croatia. 28. See, for example, New Zealand. 29. See, for example, Russia. 30. See, for example, South Africa. 31. See, for example, South Africa. 32. See, for example, Hungary. 6