Anti-tax-avoidance Measures and Their Compliance with Community Law

• Author: Tambet Grauberg
• Position: Magister artium, prosecutor at the North Circuit Prosecution Office
• Pages: 141-150

How to treat taxpayers' transactions may differ according to whether, in applying tax norms, the tax administrator is directly guided by the institute in private law, or whether the existence of a taxable event becomes clear only after interpretation of the legal relationship. In the first case, there is no room for interpretation of the tax-related circumstances and the tax is levied directly by subsuming the facts of the transaction in compliance with the applicable tax norm. However, in many cases interpretation is necessary because no law can foresee all of the taxable situations and a casuistic tax law would allow easy avoidance of the realisation of the taxable event, e.g., through use of a wording that rules out the existence of any tax events described by said law. In order to apply an abstract norm, by contrast, one must be able to interpret it.

In applying tax norms, one must take into account the peculiarity of tax law, which does not proceed from the definitions and principles of other fields of law. If a transaction by a taxpayer is of a form that precludes, for example, the application of a taxable norm on the basis of grammatical interpretation, then the taxation shall still be based on the economic substance and result of the transaction. Tax avoidance purports to avoid the realisation of a tax norm or tax liability; thereby, the taxpayer benefits by having to pay less tax. Interpretation should enable a different assessment of the legal relationship, one aimed at a more favourable taxation regime. The rules of interpretation should be understood as measures that justify a tax authority's invasion of a taxpayer's private autonomy. States can be differentiated in their types of anti-tax-avoidance regulation.

As to their content and applicability, general anti-avoidance measures differ, depending on whether one proceeds from the provisions adopted by the legislator, which are of a general nature and can be used in the majority of cases, or from the rules (doctrines) that have evolved in judicial practice. In the first case, tax liability is determined on the basis of the criteria laid down in the legal norm, which enable assessment of a transaction under tax law. Examples of this approach can be found in the provisions of German, Austrian, Belgian, Spanish, Swedish, and Finnish tax laws. On the other hand, one can also see plenty of rules of interpretation that have evolved from judicial practice. In practice, principles have been developed over time to aid in interpreting the transactions of taxpayers. Such principles are used, for example, by the tax authorities and courts of the UK, the Netherlands, France, and Norway in determining tax liability.

The question, however, is whether a tax administrator needs special authorisation from the legislator in order to determine the existence of a taxable event with respect to transactions of taxpayers, which authorisation should also be proportionate in its accounting for the interests of the taxpayer while at the same time ensuring equal and uniform taxation. The author will analyse the measures employed by different states in order to prevent tax avoidance, how those measures have developed, and whether they comply with the stances adopted by the European Court of Justice.

1. Measures to prevent tax avoidance

1.1. Bases for the general measure

In most cases, tax avoidance measures have their beginnings in the fraus legis principle from Roman law. According to this, a person cannot rely on recourse to the law when he in bad faith aspires to gain benefit from the exercise of his subjective right. This principle, transposed from private law, has been successfully applied in developing measures to prevent tax avoidance, both in the form of a provision of law and as a doctrine evolving in judicial practice. Exceptions are Belgium and Italy, both of whom maintain that the concept of fraus legis is applicable only in civil law and not in tax matters. ¹ This principle means that exercise of rights arising from contract and law is always deemed abuse of the law where such rights are exercised contrary to the principle of good faith. This means that a court shall not, in a concrete case of mala fide tax behaviour, apply the provisions of the law or the contract concerned. ² Common-law countries, not influenced by Roman law, approach this issue a bit differently although possessing the principles of interpretation developed by the courts.

The principle of interpretation according to the substance of the transaction is widely used in examining the taxpayer's behaviour where tax avoidance is suspected. The substance is understood as the economic characteristics and results of a transaction, which are to be approached differently from the legal form of the transaction. The principles of uniformity and solvency are realised through the rule of economic interpretation. ³ The tax administrator is required to treat all taxpayers equally in taxable situations; therefore, taxes cannot be avoided merely by taking advantage of formative options possible in civil law. The concept of proceeding from the economic substance points to a need to clarify whether the conditions agreed upon by the parties have been realised in that particular legal relationship, so that the type of the taxable event can be determined. The main expression of such a method of interpretation lies in detailed description of the essential circumstances in order to identify the characteristics of a sham transaction or an incorrect legal form that the taxpayer used to avoid taxes. ⁴

The general anti-avoidance rule is used by the legislator to express the intent to preclude manipulation of the tax incentives set out in law. The measure creates standards to be considered in interpreting transactions under tax law, which enable examining the compliance of a transaction in view of the meaning of the norm. Doctrines and legal norms undertake to limit tax avoidance in situations where such avoidance cannot be prevented by a special provision. In application of the measures, two important similarities can be observed:

1. the test of the business purpose; and

2. teleological interpretation of a tax norm in order to distinguish a forbidden transaction from one that is allowed.

The courts dealing with tax avoidance cases must be capable of coming to the right conclusions in order to recognise forbidden behaviour wherein the actors just proceed to realise the wording of the law, ignoring its spirit. ⁵ The courts need to render their opinion as to the intent of the legislator and to form conclusions as to whether or not the taxpayer meets the conditions entitling him to the right. The general measure enables precluding a situation where a more beneficial tax regime is applied to transactions entered into with improper intent.

The test of purpose or the determination of the business goal of the taxpayer's actions refers to the desired results of the transaction, as, in principle, it is possible for the same economic result to be achieved with several legal forms. ⁶ This may be referred to as a subjective element that attempts to identify the taxpayer's intentions in his tax planning activity. If a transaction carries no business goal, one may conclude that the form assigned to the transaction is incorrect and that characteristics of abuse of the law are present. Lack of a business goal is also seen with transactions that may bring about an economic result but in whose execution the tax aspects were the primary focus. Such an approach carries greater weight in those cases where a taxpayer wishes to choose between modes of actions that have different tax implications. To a certain extent, it is allowed to plan taxes, and therefore the tax administrator's activity might be seen as arbitrary if they treat a taxpayer's preference for a milder tax regime as automatically constituting tax avoidance on the taxpayer's part.

After identifying the business goals, the tax administrator is tasked with contrasting the result against the spirit of the tax norm. Tax avoidance should be understood as activity that abuses the rights set forth in the tax law. In interpretation of the norm, it should be clarified whether the result achieved by the concrete transaction is in compliance with the intent of the legislator. If there are several options, the administrator must evaluate whether the transaction has artificially been adjusted to fit the taxation scheme, with the substance of said transaction being more in line with the characteristics of another type of transaction. ⁷ General measures help the tax administrator in preventing tax avoidance, subject to application in cases where the employment of a form under civil law hinders just taxation.

1.2. Differences between interpretation in civil law and tax law

The majority of the tax norms tie consequences in tax law to legal relations, which take a typical civil-law form; this might cause problems where the elements of a tax event are provided for too rigidly. In civil law, the economic effect actually desired by a taxpayer is also achievable through atypical activity. The more directly one relies on a certain type of contract, the more the interpretation should be based on the economic substance of the transaction. ⁸ Contractual...