Form and substance in tax law: the reaction to tax avoidance from an EU perspective Pasquale Pistone, IBFD Academic Chairman IFA Asia-Pacific - Seoul, 12 May 2016

Outline 1. Basics about EU tax law 2. Statutory and judicial GAARs at national and EU level 3. The EU Anti-BEPS package of 28 January Possible developments and conclusions © 2016 IBFD2

 Supranational law of the European Union prevails over national law with partial surrender of powers to the Union (directives)  Powers kept at national level must be exercised in conformity with EU rules on fundamental freedoms (non-discrimination of goods, persons, services and capital) and prohibition of State aids within EU (capital: also third countries)  Judicial reaction to tax avoidance (= abusive practices) developed at interpretation level by the European Court of Justice as justification to violations of fundamental freedoms by EU Member States  National tax law may include statutory and judicial GAARs, but their application requires that the reaction to actual abusive practices complies with the principle of proportionality (case-by- case analysis required)  Landmark cases: Halifax (VAT), Cadbury Schweppes (direct tax) 1. Basics about EU tax law © 2016 IBFD3

 Harmonised taxes (e.g. VAT) – obligation to counter abusive practices under EU law  Non-harmonised taxes (direct taxes) – obligation to counter abusive practices only insofar as affecting internal market  In the absence of directives  National law reacts to abusive practices along different schemes (fraude à la loi, abuse of law, economic reality) through statutory and judicial techniques  Sham often regarded as leading to tax evasion  In the presence of directives  Earlier version of EU direct tax directives included right, but not obligation to counter abusive practices  New versions of EU direct tax directives include obligations to counter abusive practices 2. Statutory and judicial GAARs at national and EU level © 2016 IBFD4

 Statutory vs. judicial  Statutory vs. interpretative  General (GAARs), targeted or sectoral (TAARs), ad hoc or specific (SAARs)  Domestic law vs. treaty (both regarded as national law for EU law purposes)  Supranational law vs national law 2. Categories of anti-tax avoidance measures © 2016 IBFD5

 Substance over form and factual recharacterisation: Cyprus, Czech Republic, Estonia, Finland, Hungary, Netherlands (also richtige heffing), Poland, Romania, Slovakia  Abuse of law GAAR: Austria, Belgium, Bulgaria, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Portugal, Spain, UK  Fraus legis GAAR: Croatia, Netherlands (judicial)  TAAR: Sweden  No GAAR, but application of civil law: Latvia, Lithuania, Slovenia  Judicial approach prevailing: France, Netherlands  Last GAARs introduced in: 2013 Greece and UK, 2015 Denmark and Italy 2. Approaches to tax avoidance in EU MSs: an overview © 2016 IBFD6

Article 1 (2) Parent-Subsidiary Directive (implemented as of ) 2. Member States shall not grant the benefits of this Directive to an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. 3. For the purposes of paragraph 2, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 4. This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse. 2. Example of GAARs in EU direct tax directives © 2016 IBFD7

 EU MSs pursue full implementation of BEPS reports  Common implementation through supranational EU law enhances level-playing field within the Internal Market, but shifts powers  BEPS implementation requires international tax coordination to effectively counter tax avoidance and aggressive tax planning  Tax avoidance and aggressive tax planning share a friction between form and substance aimed at obtaining tax advantages, but are two different phenomena, also from the perspective of the internal market  EU Recommendation 8806 of 6 December 2012: taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability through double deductions or double non-taxation 3. The EU and the implementation of the BEPS project © 2016 IBFD8

3. Tax avoidance and aggressive tax planning  Three elements: 1. Friction between form and substance to obtain tax advantage (causal link with internal inconsistency) 2. Purely artificial transactions lacking valid economic reasons 3. Intention to avoid tax duly reflected in objective elements Generally reflecting existence of abusive practices  Three elements: 1. Exploitation of cross-border tax disparities to obtain bilateral tax advantages (causal link with external inconsistency) 2. Misalignment between taxing powers and value creation 3. Unintended tax advantages resulting from double non- taxation No abusive practice in one tax system Tax avoidanceAggressive tax planning

 Reaction to aggressive tax planning reflects the need to preserve the balanced allocation of taxing powers between States, but requires no evidence of the existence of abusive practices  European Union law requires the reaction to tax avoidance to:  Apply anti-abuse measures that are suitable to achieve their goals and comply with the principle of proportionality in order to be justified  Protect persons acting in good faith  Measures can counter either or both phenomena (overlaps in BEPS 2 and 5), but anti-abuse measures are not necessarily suitable to counter aggressive tax planning  Reaction to aggressive tax planning requires international tax coordination and enhances integration within the EU internal market, including the production of measures of tax harmonization 3. Aggressive tax planning and EU tax law © 2016 IBFD10

3. The measures announced on 28 January 2016 COM 23 – the Anti-BEPS tax package and its underlying policy COM 24 – the EU external tax strategy Recommendation 271 – PPT GAAR in tax treaties and PE definition COM 25 – broadening the scope of automatic EoI on CbC reporting COM 26 – EU Anti-BEPS Tax Directive 1. Interest limitation (Article 4) 2. Exit taxes (Article 5) 3. Switchover (Article 6) 4. EU GAAR (Article 7) 5. CFC (Articles 8-9) 6. Anti-Hybrid rule (Article 10) Pure soft lawDraft legislation

CEN and hidden tax protectionism in relations with non EU States  More than pursuing level playing-field within the EU internal market  Switchover produces quasi-automatic compensation of tax differentials (statutory rate <40% EU country) in third countries only (including EEA!): it stretches taxing powers of EU country on income sourced elsewhere, possibly not in line with the BEPS goals of aligning taxing powers with value creation  NB – The EU Parliament report of 1 March 2016 extended this measure also to intra-EU relations  May for active business income carve-out be enough?  Includes CFC rules that comply with CJEU definition (thus away from the partly wholly artificial arrangement concept of BEPS Report on AI 3!) 3. Some critical points in the EU implementation of BEPS © 2016 IBFD12

1. Non-genuine arrangements or a series thereof carried out for the essential purpose of obtaining a tax advantage that defeats the object or purpose of the otherwise applicable tax provisions shall be ignored for the purposes of calculating the corporate tax liability. An arrangement may comprise more than one step or part. 2. For the purposes of paragraph 1, an arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 3. Where arrangements or a series thereof are ignored in accordance with paragraph 1, the tax liability shall be calculated by reference to economic substance in accordance with national law 3. The proposed GAAR in the Draft EU Anti-BEPS Directive © 2016 IBFD13

 Legal uncertainty due to  LoB clauses: EU Commission issues on reasoned opinion on NL-JPN DTC and impact on fundamental freedoms  Several GAARs and possible difference in PPT standards  Recommendation 271: "Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that it reflects a genuine economic activity or that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention." 3. No LoB for tax treaties of EU States, but a PPT © 2016 IBFD14

 Adoption of EU Anti-BEPS package or parts already in May 2016  Reaction to tax avoidance in relations with EU States is very complex due to  Existence of multiple GAARs in EU tax directives or otherwise indicated by soft EU law  Existence of non-homogeneous GAARs, TAARs and SAARs in national tax law  Strong risk for legal uncertainty and tax arbitrage in the presence of non-homogeneous reaction to tax avoidance and aggressive tax planning (BEPS à deux vitesses)  Implementation of BEPS project by the EU is in fact being used as a tool for countering tax avoidance with stricter unilateral measures to third countries, which are not applicable to intra-EU relations 4. Possible Developments and Conclusions © 2016 IBFD15

Thank you! © 2016 IBFD16