Opinion Statement of the CFE ECJ Task Force

Transcription

1 Opinion Statement of the CFE ECJ Task Force on the Concept of Abuse in European Law, based on the Judgments of the European Court of Justice Delivered in the Field of Tax Law November 2007 Paper submitted by the Confédération Fiscale Européenne to the Council of the European Union, the European Commission and the European Parliament in 2007

2 This is an Opinion Statement prepared by the Task Force on the concept of abuse in European law 1. Unlike the recent Opinion Statements, this one tries to reconstruct such concept not on the basis of one single judgment, but rather by taking into account the various relevant statements made by the European Court of Justice in respect of abuse throughout the past decades, with special emphasis on the direct tax and VAT cases. The CFE is the leading European association of 29 national tax advisory organisations representing over 160,000 tax advisers. 1. This Opinion Statement aims at reconstructing the concept of abuse in European tax law. 2. Reference to abuse has become a regular feature in the tax judgements of the European Court of Justice. However, linguistic and conceptual discrepancies arising from such judgements make the concept of abuse far from being clear. 3. In particular, this Opinion Statement will reach its conclusion after analysing (i) the differences traditionally existing in international tax law between avoidance, evasion and fraud (ii) their respective relationships to abuse, (iii) the problems of terminology of abuse in a multilingual legal system such as European law, (iv) the dimension of abuse in general European law, (v) the possibility to achieve a common legal understanding of abuse in all various fields of European law, or at least for direct taxes and VAT, and for primary and secondary law. Based on such elements (vi) the Opinion Statement will not only ascertain whether an autonomous concept of abuse in European tax law currently exists, but also whether it is desirable in the near future, or, by contrast, whether such concept needs to be based on a combination between European law and the respectively applicable domestic and or tax treaty law of the State(s) involved. 1. The traditional categories in international tax law: avoidance, evasion and fraud 4. A taxpayer may undertake different paths to refrain from paying taxes. Nevertheless, the reaction of each legal system to such phenomenon differs according to the intensity of the danger resulting from the taxpayer s behaviour. The following categorisation has become common ground in the field of international tax law since the 1980 s Tax avoidance arises when a taxpayer circumvents the taxable event of a taxing provision (or unduly seeks the benefits of a tax advantage), by exploiting the friction 1 Although the Opinion Statement has been drafted by the CFE Task Force, its content does not necessarily reflect the position of all members of the group. 2 See Uckmar, V., International Tax Avoidance and Evasion. General Report, 1983 IFA Congress, Kluwer, Deventer, 1983; OECD, International Tax Avoidance and Evasion, Paris,

3 between the substance of his case and the form of the tax statute, thus in fact frustrating the scope of the latter. 6. Tax evasion instead occurs when the taxpayer does not declare or pay taxes that are due on the basis of an already realised taxable event. In some cases he even conceals his liability to tax, or undertakes artificial manoeuvres or schemes aimed at preventing tax authorities from discovering such liability to tax, such as for instance by forging official documents and the like. The latter facts better known in many tax systems as tax fraud - are extremely dangerous for the national tax system, thus requiring an adequate sanction. 7. In all other cases taxpayers have a legitimate right to minimise the tax burden. 2. Abuse in European tax law and the traditional categories of international tax law 8. The European Court of Justice has obscured the traditional categories of international tax law (i.e. tax avoidance, tax evasion and tax fraud), by combining them with the terms abuse, abuse of law, abuse of rights and abusive practices. 9. A more precise differentiation within the terms related to abuse will be made in the light of the general theory of abuse in European law. Meanwhile, the tax case law of the European Court of Justice seems to indicate that abusive practices fall within each of the first two traditional categories (i.e. tax avoidance and tax evasion); however, the definition given by the European Court of Justice in the Halifax case 3 is structurally better placed within the category of tax avoidance. 10. Accordingly, abusive practices arise when, despite formal compliance with the conditions set by tax law, the taxpayer enjoys in substance an advantage that conflicts with the purpose of the tax provision. The European Court of Justice added that such situation can be seen from objective elements that prove that the essential aim of the transaction was to obtain such tax advantage: a matter that does not occur when the economic activity carried out may have some explanation other than the mere attainment of tax advantages. 11. Although explicitly quoting the Halifax decision, the Cadbury Schweppes decision worded abuse slightly differently and considered as abusive practices all wholly artificial arrangements that do not reflect economic reality 4, such as letter-box companies Letter-box companies may be the basis for a mere sham. Including them within the area of abuse would certainly shift the latter phenomenon towards fraudulent schemes aimed at carrying out tax evasion, instead of keeping it framed within the sphere of tax avoidance. 13. Even more conceptual uncertainty arises in the light of two further decisions on abuse. First, after quoting both precedents, the Thin Cap GLO decision confirms that wholly artificial arrangements may not be validly used to circumvent the legislation of the Member State, though adding that such legislation is able to prevent practices the 3 ECJ, 21 February 2006, joined cases C-255/02, 419/02, 223/03, Halifax plc et aa. 4 ECJ, 12 September 2006, case C-196/04, Cadbury Schweppes, para ECJ, 12 September 2006, case C-196/04, Cadbury Schweppes, para

4 sole purpose of which is to avoid the tax that would normally be payable on profits generated by activities undertaken in the national territory 6. This shows that, despite its wording, the European Court of Justice is more inclined to frame abusive practices within the scope of tax avoidance: a matter that perfectly matches with the nature of anti-thin capitalisation rules. 14. Second, the Kofoed decision used yet another wording (which seems influenced by the French judicial doctrines of abus de droit and acte anormal de gestion and closely resembles that used ten years before by the European Court of Justice in the Leur-Bloem decision 7 ), since it makes reference to the prohibition of improperly or fraudulently taking advantage of European law through abusive practices, namely through abnormal commercial transactions, carried out solely for the purpose of wrongfully obtaining such advantage Theoretically, one may conclude that the European Court of Justice has different concepts of abuse, respectively applicable to VAT (Halifax) and direct taxes in the absence (Cadbury Schweppes and Thin Cap GLO) and in the presence of secondary law (Kofoed). However, there is not sufficient evidence to regard this conceptual discrepancy as due to either a difference between direct taxes and VAT, or to the differences in the case law between primary and secondary law. 16. Furthermore, insofar as one considers that in the absence of secondary law, Member States may only counter abusive practices when they give rise to tax evasion schemes which would have major repercussions on domestic law, depriving of any validity all existing judicial and normative anti-avoidance clauses. This conclusion would be unfair also taking into account that both the Cadbury Schweppes and Thin Cap GLO clearly dealt with problems of tax avoidance. 3. Abuse in European tax law and problems of terminology in a multilingual legal system 17. Based on such considerations, this Opinion Statement urges the European institutions to use a more precise terminology, which corresponds to the standards of the tax idiom in international usage. 18. Clarity is particularly needed to avoid abuse being improperly mixed with other more dangerous forms of tax non-compliance, such as tax evasion and tax fraud. Some national tax systems use the term fraud for a legal technique that counters schemes of circumvention (fraus legis) of the taxable event. Such anti-avoidance technique is in fact equivalent to abuse, but is something totally different from tax fraud. 19. Problems of terminology are often accompanied by linguistic inconsistencies across the various official languages of the European Union, especially in the tax case law of the European Court of Justice. 6 ECJ, 13 March 2007, case C-524/04, Thin Cap Group Litigation Order, para ECJ, 17 July 1997, case C-28/95, Leur-Bloem, para ECJ, 5 July 2007, case C-321/05, Kofoed, para

5 20. The Elisa judgement for instance contains examples of such problem, 9 which are recurrent in the decisions of the European Court of Justice and sometimes also arise in secondary law concerning direct taxes, showing how difficult it currently is to achieve an homogeneous interpretation and application of European tax law. 4. Abuse in European law 21. Although not all national legal systems have developed legal theories of abuse, the European Court of Justice has acknowledged the relevance of abuse not only in its tax decisions, but also in various other judgments. 22. The cornerstones of the Court s concept of abuse lie in the Opinion delivered by Advocate General Tesauro in the (non-tax) Kefalas case 10 and by Advocate General Maduro in the (VAT) Halifax case In the Kefalas case the (Greek) national court asked whether domestic law may prevent a person from exercising a right granted by European law, when such right is exercised in a way that manifestly exceeds the bounds of good faith or morality, or the economic or social purpose of that right. 24. In the Halifax case the (UK) national court asked whether the right of deducting input VAT could be limited, when the economic operator carries out abusive practices, on the basis of the doctrine of abuse of rights or abuse of law. 25. The doctrine of abuse should be analysed in the light of its object, even if none of the two requesting courts did so. Accordingly, one should more properly differentiate between abusing of a right and abusing of a law, i.e. of a statute. Although the two concepts share a common mould, in the former one a person exercises a right for the purpose of causing detriment to another, thus giving rise to an anti-social behaviour (e.g. when a person smokes salmon near his neighbour s recently washed clothes), whereas in the latter one a person is not applying a statute according to its object and purpose. These categories are highly influenced by domestic law traditions, often giving rise to significant differences throughout the Member States national tax systems. In some countries abuse of law is also known (or at least includes cases of) abuse of legal form. 26. While abuse of rights is very much a civil law (droit civil) concept and has limited relevance in the field of taxes, abuse of law may occur when a taxpayer tries to circumvent the scope of a taxing rule, or to unduly benefit of an exemption provision. 27. Both latter situations represent the two main clusters of tax avoidance, which frustrates the object and purpose of a tax rule, without openly conflicting with its 9 ECJ, decision 11 October 2007, case C-451/05, Elisa. For instance the wording of para. 91 of the Elisa decision in Italian, Spanish, Portuguese and Dutch contains a reference to terms that are equivalent of tax fraud (i.e. frode fiscale, fraude fiscal in Spanish and Portuguese, and belastingfraude), whereas the English text mentions tax evasion and the French and German texts use equivalent terms to the latter wording, i.e. fraude fiscale and Steuerhinterziehung. Similar problems arise with para. 80 of the same decision, but also with other decisions, such as for instance paras. 37 and 38 of the Kofoed decision. 10 Advocate General Tesauro, Opinion delivered on 4 February 1998, case C-367/96, Kefalas. 11 Advocate General Maduro, Opinion delivered on 7 April 2005, joined cases C-255/02, 419/02, 223/03, Halifax plc et aa. 4

6 wording. In such cases the taxpayer tries to circumvent the taxable event (or unduly seeks its realization). 28. The Kefalas and the Halifax judgments presented two cases of abuse of law. In both cases the European Court of Justice was asked to ensure the uniform application of European law and in both of them it confirmed that a Member State may in principle restrict European law for the purpose of countering abusive schemes. 29. The fact that the European Court of Justice followed the same pattern in both judgments indicates that, in principle, when the object of abuse is a statute (so-called abuse of law) no major difference arises in the field of tax law, be it direct taxation or VAT, from the general pattern of European law. 30. A difference instead existed between the facts of the Kefalas and Halifax cases. Although both dealt with abuse in respect of a directive, in the latter one no statutory anti-abuse provision was applicable to the field of value-added tax, considering that the UK judge had excluded the possible application of judicial anti-avoidance techniques developed by the UK Courts on the basis of the Ramsay doctrine since the early 1980 s. Accordingly, in the Halifax decision the European Court of Justice in fact acknowledged that the object and purpose of the right to deduction in the common VAT system require it to counter abuse practices. 5. The quest for an autonomous concept of abuse in European tax law 31. There seem to be no reasons to make the concept of abuse depart in the field of taxes from the general one. 32. Accordingly, this Opinion Statement should now ascertain what degree of interaction is allowed by European law with respect to domestic notions of abuse, as applicable under the provisions contained in the national law of each EU Member State. 33. Once more, it seems important to recall that, in the Kefalas decision, the European Court of Justice stressed the need for a homogeneous interpretation and application of European law. In such case, as well as in the Halifax decision the focus was on the impact of abusive practices on EU directives. 34. In the majority of cases so far analysed by the European Court of Justice in the field of direct taxes (e.g. ICI, Lankhorst-Hohorst, Cadbury Schweppes, Thin Cap GLO), however, the Court has judged on the compatibility of domestic anti-abuse provisions with the EU fundamental freedoms. 35. Not even in such different contexts may a non-homogeneous concept of abuse be justified, since here the focus is also on whether and to what extent domestic tax provisions may justify a restriction on the exercise of rights that the EC Treaty has granted to all EU nationals. 36. Accordingly, autonomous characterization for European law purposes requires an autonomous concept of abuse, which takes into account the degree to which each Member State counters abusive tax practices, though imposing on them the obligation of not exceeding the limits which European law requires. 5

7 37. This interaction between domestic anti-abuse techniques and the homogeneous concept of abuse in European law gives rise to a fairly peculiar context in the field of direct taxes, whereby problems could arise when a Member State does not effectively counter abusive practices, especially when such practices have a cross-border dimension within the Internal Market. 38. In principle, this problem should be analysed by focusing on the impact of the Halifax judgment in other (and non-harmonised) fields of tax law, taking into account that in the field of value-added tax such judgment severely limits (if not completely excludes) the right of EU Member States to apply their domestic anti-abuse provisions outside of the pattern indicated by the European Court of Justice 39. Different arguments could be put forward in this respect. On the one hand, Member States could support the view that European law may not deprive them of the right to choose whether and how to counter abusive practices. Accordingly, each Member State should keep its anti-abuse techniques in the field of direct taxes, whereas European law should just ascertain whether they are incompatible with primary and secondary EU law. 40. On the other hand, we should not forget that the European Court of Justice has shown a growing concern for ensuring fair tax conditions to compete within the Internal Market, focusing its attention not only on abusive practices, but also specifically on the need to counter double dipping schemes, whereby a taxpayer obtains the same tax treatment (normally an advantage) twice in two different Member States. 4. The Statement 41. Accordingly, the Confédération Fiscale Européenne supports the view that EU Member States should still be allowed to apply their domestic and treaty anti-abuse measures in the fields of tax law that have not been either harmonised or coordinated, subject to the condition that such measures do not give rise to unjustified restriction on the exercise of fundamental freedoms: a matter that should be interpreted in light of the case law of the European Court of Justice. 42. For such reason, the Confédération Fiscale Européenne believes that the European institutions should overcome the linguistic and conceptual lack of clarity that currently surrounds the scope of abuse, especially in the field of tax law. 43. From such perspective, the Task Force believes that Member States are currently allowed to apply their domestic and treaty anti-abuse measures in respect of tax avoidance schemes, whenever such measures are compatible with the principles of proportionality and are capable of achieving the goal for which they have been established. 44. However, the Confédération Fiscale Européenne wonders whether leaving Member States in the future free to decide how to counter abuse is in fact in line with the principles and goals of the Internal Market. 6