Revisiting Tax Avoidance: Session 2 The role of GAARs OXFORD LAW Revisiting Tax Avoidance: Session 2 The role of GAARs Judith Freedman, Pinsent Masons Professor of Tax Law, Oxford University Law Faculty, EATLP Munich 2 June 2016

Conceptual basis of GAARs Special rule of interpretation (searching for true purpose, policy objectives or ‘spirit’ of legislation) OR Overriding principle- reconstruct transaction due to artificiality, contrived steps, lack of commerciality, economic substance . Either way often based on purpose or motive of taxpayer- (subjective or objectively tested) Benefits denied or ‘economic substance’ taxed?

GAARs: more than interpretation Most jurisdictions have purposive interpretation so GAARs must go further Gap filling- shortcomings in legislation. Is GAAR excuse for sloppy drafting? Retrospectivity? Constitutionality- separation of powers. GAAR is application of anti-abuse principle that defines scope of underlying law: thus domestic GAAR interacts with TAARS, SAARS and treaties by defining domestic law- not overriding specific domestic or treaty provisions. Confirmed BEPS Action Plan 6 final report- and not modified by proposed OECD Model GAAR

Dealing with uncertainty Uncertainty not contrary to rule of law if guidance available (Raz, ‘law must be capable of guiding the behaviour of its subjects’) Administrative framework, rulings, guidance, clearances eg French (2.1); UK panel; Comité de l’abus de droit Contrast case law, SAARS and TAARs: also uncertain but less special protection ‘Harmonised’ GAAR at EU level without harmonised underlying Corporation Tax could lead to uncertainty- must be rooted in underlying law. Difficulties for CJEU interpretation, especially where GAAR applies more generally

Drafting of GAARs Wording of provisions- especially cross border provision- potential minefield. Same word may mean different things eg- Sole purpose, main purpose or one of main purposes; principal purpose: essential purpose (essential = principal (Part Service 2008 Case C-425/06) ). But see French constitutional difficulties (2.1.3) Role of subjectivity? Subjective motive often rejected as test or ‘judged objectively’ eg Germany, UK , EU . Artificiality, commercial reasons, economic reality – but must link to anticipated result and purpose of legislation when enacted.

Limitations of GAARs Can only work with legislation- legislation must have a discernible purpose. Therefore tied to underlying law and culture of that law and society Cross border with non harmonised tax and in treaties could be especially difficult- whose purpose? Who judges? Cannot deal with mismatch between two systems of intended results from one jurisdiction. Thus GAARs cannot be used to fundamentally reform or re-design tax system Useful role for GAARs at domestic level but last resort weapon but not a total solution. At international level role less straightforward.

Conclusions Trend world wide towards GAAR adoption at domestic level- UK (2013) – Poland (2016)- India? EU ATAD proposal for CT (2016). Japan considering. GAARS useful default provision and deterrent but not appropriate mechanism for rewriting domestic or international tax law to change tax base originally envisaged: can only protect original objectives. Therefore GAARs do not remove need for clear principles of taxation and good drafting At international level existence of GAAR in treaty could give spurious comfort.

BEPS Action Plan 6 Article X …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 granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.

EU Proposed Anti Tax Avoidance Package 28.1.16 Article 7 General anti-abuse rule 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.