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 GAAR v SAAR - or both? 3 Need for GAARs and SAARs 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). GAAR v SAAR - or both? 4
Need for GAARs and SAARs 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 GAAR v SAAR - or both? 5 Need for GAARs and SAARs [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 GAAR v SAAR - or both? 6
Need for GAARs and SAARs 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 GAAR v SAAR - or both? 7 Policy considerations Freedom to arrange affairs tax efficiently Legal certainty Simplicity Foreign direct investment and debt markets vs. Equity Credibility Revenue GAAR v SAAR - or both? 8
Policy considerations 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 GAAR v SAAR - or both? 9 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. GAAR v SAAR - or both? 10
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 GAAR v SAAR - or both? 11 GAARs and SAARs SAARs Domestic Anti-deferral Interest deduction limitation Character of income Etc. GAAR v SAAR - or both? 12
GAARs and SAARs SAARs International Transfer of residence Base companies Base erosion Character of income GAAR v SAAR - or both? 13 GAAR v SAAR GAAR General safeguard Uncertainty SAAR Effective Complexity GAAR v SAAR - or both? 14
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 v SAAR - or both? 15 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 GAAR v SAAR - or both? 16
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 v SAAR - or both? 17 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 GAAR v SAAR - or both? 18
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 GAAR v SAAR - or both? 19 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 GAAR v SAAR - or both? 20
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) GAAR v SAAR - or both? 21 Abuse of tax treaties State A State B State C X Ltd Y Ltd Z 1111 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? 22
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 GAAR v SAAR - or both? 23 Abuse of tax treaties - Dividends A Holding (Switzerland) vs. BNB 1994/253 (The Netherlands) + Prévost (Canada) Dividends Treaty benefits denied based on abuse (inherent antiabuse) Treaty shopping is ok Intermediate holding is beneficial owner (BO) GAAR v SAAR - or both? 24
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 GAAR v SAAR - or both? 25 Abuse of tax treaties Legitimacy of treaty shopping Application of domestic rules Treaty interpretation Inherent anti-abuse rule in tax treaties? Beneficial ownership GAAR v SAAR - or both? 26
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 GAAR v SAAR - or both? 27 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 GAAR v SAAR - or both? 28
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 GAAR v SAAR - or both? 29 Abuse of tax treaties "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 GAAR v SAAR - or both? 30
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 GAAR v SAAR - or both? 31 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) GAAR v SAAR - or both? 32
Beneficial ownership 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) GAAR v SAAR - or both? 33 Beneficial ownership 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) GAAR v SAAR - or both? 34
Beneficial ownership 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 GAAR v SAAR - or both? 35 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 GAAR v SAAR - or both? 36
Thank you for your attention. GAAR v SAAR - or both? 37