Comparative anti-avoidance rules in UK, France, the EU & the U.S. 1

Transcription

1 Comparative anti-avoidance rules in UK, France, the EU & the U.S. 1 Abstract The objective of this paper is to make a comparison between the anti avoidance rules in UK, France, the European Union and the United States to determine what are the similarities and differences in these different anti avoidance rules. It seems interesting to make a comparison of these rules with regard of the recent cases of tax avoidance of companies such as Starbucks, Amazon, Google, Apple, inside these legal systems. This paper tries briefly to analyze the main characteristics of the anti-avoidance of these tax systems. Keywords Tax avoidance United Kingdom France European Union United States 1 Miguel NICOLAS, PhD student in Law, University of Cergy-Pontoise 1

2 1. Introduction Tax avoidance can have different meanings. In general tax avoidance is understood as any lawful ways to reduce your tax liability. However, there is some confusion with some neighbor concepts such as tax evasion or tax fraud. Nonetheless, it seems that tax evasion and tax fraud are synonym 2 from our point of views. Another issue, it is the difference in translation with regard of these concepts. In French, tax avoidance is translated by évasion fiscale. In the same way, tax evasion (or tax fraud) is translated in French by fraude fiscale. Tax avoidance arises through schemes of tax planning to minimize tax liability. Tax planning is mainly the result of tax incentives from the States, or the use of the different loopholes from the different tax systems by the taxpayers. On this last aspect, we have to highlight a phenomenon which was pointed out by the OECD 3, which is so-called aggressive tax planning. Aggressive tax planning are from different techniques of tax avoidance, which are borderlines concerning their lawful aspect. Nonetheless, even if it is not legal, most of tax people agree to say that it is not really moral 4 or ethics. In the struggle of the States against tax avoidance, we can operate different distinctions concerning the anti-avoidance rules. We can distinguish first, between statutory antiavoidance rules which are enacted from the parliament, from judicial anti-avoidance rules which are from the case-law of the Courts. We have then on the one hand General anti-avoidance rules (GAAR) which can apply to any kind of tax avoidance, with regard of its general scope, and we have on the other hand Targeted anti-avoidance rules (TAAR) which can apply to specific tax avoidance scheme. Through this paper, we will briefly study the main features of the anti-avoidance rules of some States and also the European Union. Then, we will compare the structure of these antiavoidance rules. Following this comparison, we will compare the content of these antiavoidance rules, and finally we will draw some short conclusion about the anti-avoidance rules. 2 See also, with the same point of view, V. Thuronyi, Comparative Tax Law, p. 154 et s., Kluwer Law International, OECD, Aggressive Tax Planning based on After-Tax Hedging, J. Freedman, Defining Taxpayer Responsibility: In Support of a General Anti-Avoidance Principle, p. 335 et s., British Tax Review, 2004, n 4 2

3 2. Comparative description of the domestic anti-avoidance rules In this part, we will do a comparative description of the anti-avoidance rules of the United Kingdom, France, the European Union and the United States United Kingdom United Kingdom is a common law country, they do not have a General anti-avoidance rules. Consequently, they have only judicial anti-avoidance rules and some targeted anti-voidance rules General aspect The preliminary and historical case in this matter is the famous Duke of Westminster case, where the court did not act instead of the parliament, and decided, that a taxpayer is totally free to handle its business in a way to pay the minimum tax possible with regard the law 5. One of the reasons of this attitude by the court 6 was due, by the fact that they did not see themselves as a legislator, and that it is the function of the Parliament to bridge the gap of tax loopholes of the British tax system. Nonetheless, since about 1980, the courts start to change their mind concerning their function with regard tax avoidance case. Consequently, following the Duke of Westminster case 7, the House of Lord evolved in its views concerning tax avoidance, with the other important UK case related to tax avoidance, the W.T. Ramsay Ltd. v. Commissioners of Internal revenue case 8. In the Ramsay case, the House of Lords said that the different step of a tax avoidance scheme can be analyzed as a whole to disregard the transaction. Nonetheless through the Ramsay case, the House of Lords 5 For a depth analysis in this area, see Freedman J., Defining Taxpayer Responsibility: In Support of a General Anti-Avoidance Principle, p , British Tax Review, 2004, n 4; V. Thuronyi, Comparative Tax Law, p. 172 et s., Kluwer Law International, J. Tiley, United Kingdom, p. 121 et s., in Comparative Income Taxation, edited by H. J. Ault, Kluwer Law International, IRC v Duke of Westminster[1936] AC 1 (HL) 8 Ramsay (W T) Ltd v IRC, Eilbeck (Inspector of Taxes) v Rawling [1981] UKHL 1 3

4 evolve in its way to deal with tax avoidance, but nonetheless, the principle of the Duke of Westminster case can still apply to some taxpayer to permit to get the least tax liability with regard the tax law. The principle established by the Ramsay case was confirmed and extended by the Furniss v. Dawson case Specific aspect: Targeted anti-avoidance rules Although the UK does not have a GAAR, it has a numerous TAAR provisions 9. Most of them are in financial matters. We have, in particular, bond washing, manufactured dividends, Dividend stripping, the cancellation of tax advantages concerning transaction in securities, sale by Individual derived from personal activities, and also artificial transaction in Land. Nonetheless, in practice some TAAR can have a broader application than their originally targeted scope, and at the end, become almost general France France is a Civil law country 11, and have two Statutory General anti-avoidance rules 12 enacted from the law. They are codified in the French Tax Code (Code Général des Impôts) and the French Procedural Tax Book (Livre des Procédures Fiscales). Alongside, the French tax system has a number of Targeted anti-avoidance rules General aspect Concerning the French GAAR, we have on the one hand abuse of law (abus de droit), and on the other hand, we have Abnormal Act of management (Acte Anormal de Gestion). 9 For a detailed and illustrative analyze, see Tiley Jh., Revenue Law, Hart Publishing, 2000, 4th edition, p. 969 et s. ; P. Morton and L. Sykes, IFA Cahiers Volume 95A - Tax Treaties and tax avoidance - application of anti-avoidance provisions United Kingdom, p P. Morton and L. Sykes, IFA Cahiers Volume 95A - Tax Treaties and tax avoidance - application of antiavoidance provisions United Kingdom, p V. Thuronyi, Comparative Tax Law, p. 146, Kluwer Law International, 2003; S. Austry et M. Collet, IFA Cahiers Volume 95A - Tax Treaties and tax avoidance - application of anti-avoidance provisions France, p G. Gest, France, p. 47 et s., in Comparative Income Taxation, edited by H. J. Ault, Kluwer Law International,

5 Abuse of law in tax law is from the theory of abuse which was developed 13 in the past, by the French civil court Abuse of law permits to the French Tax Authorities to override any kind of transaction which are fictitious or genuine but with the only one target is to avoid the taxation 14. Abuse of law in tax matters was enacted and codified in The abnormal act of management permits to the French Tax Authorities to disregard the deductibility of expenses that it will estimate which are not spent in the interest of the enterprise Specific aspects The French tax system provides a number of targeted anti-avoidance rules. There are on the one hand targeted anti-avoidance rules concerning legal entities or companies, and on the other hand targeted anti-avoidance rules concerning individuals. There is in particular, French CFC Rules, thin cap rules, or anti rent-a-star companies European Union The European Union (EU) does not have any general anti avoidance-rules. Consequently taxpayer are allowed to use EU Law, and in particular the fundamental freedoms of EU Law to arrange at the best their tax situation and reduce their tax liability. The ECJ said in particular that a 15 : Member State cannot set up a general presumption of tax evasion and justify a measure which compromises the exercise of a fundamental freedom guaranteed by the Treaty. Nonetheless the ECJ permits to the EU Member States to fight against some tax avoidance transaction in the case of abusive practice using wholly artificial arrangement which does not have any economic substance and whom the single goal is to avoid tax. The ECJ said that the 13 S. Austry et M. Collet, IFA Cahiers Volume 95A - Tax Treaties and tax avoidance - application of antiavoidance provisions France, p. 314 et s. 14 S. Austry et M. Collet, IFA Cahiers Volume 95A - Tax Treaties and tax avoidance - application of antiavoidance provisions France, p ECJ, September 12 th, 2006, Cadbury Schweppes pic, Cadbury Schweppes Overseas Ltd v. Commissioners of Inland Revenue 5

6 restriction of the EU fundamental freedom can nonetheless be justified 16 on the ground of prevention of abusive practices, the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory United States United States is a common law country, and does not have a GAAR, but there are different judicial anti-avoidance rules. The U.S. judiciary did not appear reluctant with regard of tax avoidance even if there is not GAAR enacted by the parliament. Consequently, the U.S. judiciary appeared very involved 17 to counteract 18 tax shelter with several judicial antiavoidance rules. We can distinguish several rules. There are, substance over form (1), step transaction (2), business purpose (3), sham transaction (4), and economic substance (5) Substance over form The substance over form 19 consists to disregard any kind of transaction where the substance is different from the form. Consequently the Court will disregard the legal form of the transaction, and will retain the economic substance of the transaction to qualify it. In the leading case Gregory v. Helvering 20 concerning the substance over form doctrine the U.S. Supreme Court stated that: 21 As a general rule, the incidence of taxation depends on the substance rather than the form of the transaction. This doctrine is very often used to distinguish debt from equity transaction, in the framework of some tax planning arrangements. 16 ECJ, September 12th, 2006, Cadbury Schweppes pic, Cadbury Schweppes Overseas Ltd v. Commissioners of Inland Revenue 17 V. Thuronyi, Comparative Tax Law, p. 160 et s., Kluwer Law International, J.R. Repetti, United States, p. 150 et s., in Comparative Income Taxation, edited by H. J. Ault, Kluwer Law International, A. P. Varma and Ph. West, IFA Cahiers Volume 95A - Tax Treaties and tax avoidance - application of anti-avoidance provisions United States, p Gregory v. Helvering, 293 US 465 (1935), aff g 69 F.2d 809 (2d Cir. 1934). 21 A. P. Varma and Ph. West, IFA Cahiers Volume 95A - Tax Treaties and tax avoidance - application of anti-avoidance provisions United States, p

7 Step transaction According to the step transaction doctrine 22, the different separate steps of a transaction can be analyzed by the Court as a single transaction. It can be analyzed a single transaction, in particular, because it is interconnected steps. Through the different application of the step transaction doctrine 23 courts and the IRS typically have applied three alternative tests. In the strictest test, the binding commitment test, a series of transactions will be stepped together only if, at the time the first step occurs, there is a binding commitment to undertake the subsequent steps. In the mutual interdependence test, a series of transactions will be stepped together if the steps were so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series. Under the end result test, a series of transactions will be stepped together if the parties intent at the commencement of the transactions was to achieve the particular result and the steps were all entered into to achieve that result Business purpose Business purpose 24 doctrine applies mainly in the framework of corporate reorganization. It requires that a corporate reorganization has a business purpose. It can also be viewed as a part of the sham transaction. That is the case, when a transaction does not have any other target 25 than the reduction of the tax liability Sham transaction According to the Shan entity doctrine, a transaction can be disregard when it I a sham or unreal transaction. One of the leading U.S. cases in this regard is the Aiken Industries v. 22 A. P. Varma and Ph. West, IFA Cahiers Volume 95A - Tax Treaties and tax avoidance - application of anti-avoidance provisions United States, p. 832 ; V. Thuronyi, Comparative Tax Law, p. 169 et s., Kluwer Law International, A. P. Varma and Ph. West, IFA Cahiers Volume 95A - Tax Treaties and tax avoidance - application of anti-avoidance provisions United States, p V. Thuronyi, Comparative Tax Law, p. 169, Kluwer Law International, A. P. Varma and Ph. West, IFA Cahiers Volume 95A - Tax Treaties and tax avoidance - application of anti-avoidance provisions United States, p. 828 et s. 7

8 Commissioner 26. The rationale of the Sham transaction was explained as the following by the D.C. Circuit 27 First, the sham transaction doctrine is simply an aid to identifying tax-motivated transactions that Congress did not intend to include within the scope of a given benefitgranting statute; and second, a transaction will not be considered a sham if it is undertaken for profit of for other legitimate nontax business purposes Economic substance According to the economic substance doctrine, a transaction which has not any economic substance can be disregard. The leading case concerning the economic substance doctrine was the Knetsch v. U.S 28. Concerning the economic substance, the Court stated that 29 The inquiry into whether the taxpayer s transactions had sufficient economic substance to be respected for tax purposes turns on both the objective economic substance of the transactions and the subjective business motivation behind them. 3. Comparative structure of the anti-avoidance rules We can see, with regard of the structure, on the one hand the comparative legislative aspect (1), and on the other hand the comparative judicial aspect (2) Comparative legislative aspect Concerning the legislative aspect of tax avoidance rules, we can distinguish different cases. France has enacted statutory general anti-avoidance rules, whereas, UK and the US does not have enacted a general anti-avoidance rules. At the contrary, all these States have different targeted anti-avoidance rules, which apply to counteract specific tax avoidance schemes. The EU does not have any statutory general or targeted anti-avoidance rules, because the EU does not have any competences in direct taxation. 26 Aiken Industries, Inc. v. Commissioner, 56 T.C. 925 (1971). 27 Quoted by V. Thuronyi, Comparative Tax Law, p. 164 et s., Kluwer Law International, Knetsch v. United States, 364 U.S. 361 (1960) 29 V. Thuronyi, Comparative Tax Law, p. 165 et s., Kluwer Law International,

9 3.2. Comparative judicial aspect Concerning the judicial aspect, we can distinguish different cases, in the ways that the courts deal with anti-avoidance rules. The British Courts are very reluctant to interpret the tax provision beyond the intent of the parliament, and especially does not see its function as legislator bis, even if in this regard, their attitude evolved. The French courts try to follow the black letter law, by the fact they feel bound by the statutory anti-avoidance rules. Finally the U.S. courts and the European Court of Justice have a pro-active role in the way to fight against tax avoidance scheme. Contrary to the British courts, the U.S. courts think that the implement the intent of the U.S. Congress when they use judicial anti-avoidance rule to fight against tax avoidance. So, consequently they assumed that these rule are legitimate. The ECJ has a view which is connected to the single market. The attitude of the ECJ is to protect the European legal order. Finally, with regard of the case law of these courts, we can see that when the tax avoidance schemes take an abusive aspect, they do not hesitate to disregard the transaction. 4. Comparative contents of the anti-avoidance rules From a general point of view, we can see that the different content of these different antiavoidance rules are quiet similar (1), even if there are some slight differences (2) Similarities We can see that when tax avoidance schemes use different separate transactions, all the courts do not hesitate to take all the transactions as a whole Tax planning with a real economic or commercial purpose does not constitute tax avoidance and is considered as lawful. In the other sense, all artificial arrangements are considered as tax avoidance. All the courts seem agree on the fact that a tax avoidance transaction can not be lawful if there is no economic or commercial purpose. The U.S. courts and the French courts have the same views concerning the sham/simulation transaction. The only difference is a question of wording. Sham transaction from the U.S. courts and simulation for the French courts. 9

10 4.2. Differences By the fact that the French courts are bound by the French statutory ant-avoidance rules, the content of the French anti-avoidance rules seems more consistent. At the contrary, in the UK and the U.S., the different courts can have different point of view about the way to interpret some anti-avoidance rules, and consequently the content of some rules can evolve with regard of court applying the rule, and reach to some inconsistency. Concerning the ECJ, it try to have some harmonized principle which can be apply in the same way by the different domestic courts of the EU Member States. The typical example is the general principle of abuse of law. 5. Conclusion Nowadays, tax avoidance became a kind of cat and mouse game between the Tax authorities and the taxpayers. Before, to think about the opportunity to build anti-avoidance rules to counteract tax shelters, the first thing to do from the States side, would be probably to avoid to give to the taxpayers, opportunities for tax avoidance. Tax avoidance starts first of all, by the different loopholes in the different tax systems. It is obvious that it is difficult to get tax consistency in a worldwide basis, but each States should think about the consistency of its own tax systems. 10

11 Bibliography Books Ault H. J., Comparative Income Taxation, Kluwer Law International, 1997 Tiley J., Revenue Law, Hart Publishing, 2000, 4 th edition Thuronyi V., Comparative Tax Law, Kluwer Law International, 2003 Articles Austry S. and Collet M., IFA Cahiers Volume 95A - Tax Treaties and tax avoidance - application of anti-avoidance provisions France, p Freedman J., Defining Taxpayer Responsibility: In Support of a General Anti-Avoidance Principle, p , British Tax Review, 2004, n 4 Morton P. and Sykes L., IFA Cahiers Volume 95A - Tax Treaties and tax avoidance - application of anti-avoidance provisions United Kingdom, p Varma A.P. and West Ph., IFA Cahiers Volume 95A - Tax Treaties and tax avoidance - application of anti-avoidance provisions United States, p. 829 et s. 11