• Are tax avoidance strategies reducing tax certainty?

    By Enza Sonetti


    In a globalized world, the adoption of proper tax avoidance prevention policies becomes every day harder and more complicated and affects tax authorities action plans that need to change according to tax planning strategies. This new framework has forced OECD and European Commission to new approaches aiming to prevent tax bases erosion.

    Over the past few years, OECD and European Union have been recommending the implementation or the improvement of tax compliance systems, of multilateral cooperation as the increase of disclosure duties. But the continuous and rapid changes in tax strategies need to be coordinated with taxpayer’ rights and in particular with the protection of their legitimate expectations. To ensure the mentioned purposes to be met, indeed, it is necessary to provide a proper level of legal certainty that represent a safeguard both for taxpayers and tax administrations. Legal certainty requires rules with clear and stable meaning and above all, predictability of legal consequences. In particular, as the European Court of Justice has argued: “the requirements of the principle of legal certainty require that rules of law must be clear, precise and predictable as regards their effects, in particular where they may have unfavourable consequences for individuals and undertakings1”.

    Uncertainty in tax law may derive from the technical character of tax law or ambiguous language and vague legislation. Moreover, it may be a consequence of retroactive rules or of excessive use of temporary legislation in tax matters: as often happen, decree-law fix aspects like tax rates or collection rules that risk to be modified in a short time, or worse be abolished. In addition, it should be considered some socio-economic reasons related to the complexity of actual businesses framework that is characterized by the emersion of the digital economy and the increase of cross-border transactions: as IMF and OECD pointed out in their “Tax certainty report”2 of 2017 and 2018, uncertainty due to new business models and the necessary interaction of different tax rules in cross-border operations affects investments and corporation decisions on where locate their operations and activities. In this sense, it is true that tax uncertainty has not been recognized as the most important obstacle to investments, but it surely represents an operational distress to corporations that influences locational choices and that can facilitate the exploitation of loopholes and unclear rules to benefit from undue tax advantages.

    Looking into recent developments in OECD actions and European tax law, so many steps have been made in tax avoidance fighting but it is not always clear if they may conduct to a fairer and more certain tax system.

    In this sense, OECD BEPS project aims to ensure common coherent strategies in international tax matters, through multilateralism, transparency and substance over form approach, to prevent loopholes exploitation and hybrid mismatch rules directed to artificially shift profits to low or no-tax law jurisdictions. Likewise, European institutions have reached solutions to guarantee a healthy, efficient Single Market in which corporations pay taxes where they generate profits.

    OECD Multilateral Convention should be a strong instrument in preventing double non-taxation but the numerous reservations expressed by Countries and the contradiction of autonomous implementations may create a confused legal framework that facilitates profit shifting. To understand the effects of heterogeneous implementation of BEPS recommendations, it is sufficient to refer to the notion of artificial avoidance of PE status: Italy, for example, has modified the notion of Permanent Establishment but has expressed reservations and options to MLI (art. 12 and 14) that may provoke the effect of not taxing incomes deriving from different types of PE that fall within the scope of the Convention. Likewise, Spain expressed reservation with reference to art. 14 of MLI (Splitting-up of contracts) as the already existing anti-abuse rules have been considered sufficient to achieve the objective of the mentioned provision. Furthermore, referring to minimum standards, action 6 on prevention of treaty abuse has determined diatribes among scholars as the principal purpose test rule (PPT) has been questioned with respect to the level of certainty deriving from its wording.

    From another point of view, OECD and EU have increased, disclosure duties to prevent tax base erosions and involve tax intermediaries in tax audits to better assess tax risks. In this sense, both of them have provided for mandatory Country by country reporting, even if European Commission had proposed public CbCR3 against OECD position that asks for a template accessible only to tax administrations: beyond the different positions, it is clear that the threat of different requirements only for European MNEs could create uncertainty and instability that discourage investments. Still, on transparency duties and tax certainty, it is noteworthy the provision contained in Directive 2018/822 (DAC6) requiring to tax intermediaries or taxpayer (if in charge of their own tax planning) to disclosure potential aggressive cross-border arrangements if they meet some of the hallmarks indicated in Annex IV of the Directive. With reference to the disclosure of tax avoidance schemes, as British DOTAS (Disclosure of Tax Avoidance Schemes) has shown, it can improve tax certainty, helping to detect loopholes in law and to understand taxpayer behaviour. Nevertheless, DAC6 has arisen some questions about tax certainty related to wording profiles and the potential retroactive effect of its rules. The Directive refers to some concept like the moment in which the agreement is available for its implementation, or the main benefits test that reminds the PPT or the yet discussed concept of aggressive tax planning. Secondly, the Directive lets the Member Countries, free to determine the legal professional privileges that make the obligation not enforceable upon the intermediary and the penalties to apply in case of non-compliance with the rules, only providing that they have to be proportionate, dissuasive and effective: the risk is the development of 28 different penalty systems that could affect the “location” of the obligation. However, DAC6 seems to be contrary to the principle of legal certainty for two specific reasons: firstly, the Directive foresees at art. 8 bis-ter p. 12, that asks “each Member State to take the necessary measures to require intermediaries and relevant taxpayers to file information on reportable cross-border arrangements the first step of which was implemented between the date of entry into force and the date of application of this Directive”. Although the information shall be reported by the 31st of August 2020, it is unquestionable that even if national implementation lacks, tax advisers have already to consider which tax arrangements will be reported. Finally, it provides mandatory disclosure of tax arrangement but it does not fix the goals to achieve by this duty apart from guarantee an anticipated warning on potential avoidance tax risks to assess better tax audits. It is no clear, therefore, why corporations and their tax intermediaries, should voluntarily comply with this obligation in absence of a common clear discipline.

    Finally, talking about of tax avoidance prevention and tax certainty it is necessary to refer to anti-avoidance rules that have been adopted in European legislation. Council Directive 2016/11644 adopting the ATAD foresees five anti-avoidance instruments, including at art. 6 a General Anti-avoidance rule (GAAR) in which will fall all arrangements and situations not covered by specific anti-avoidance rules (SAAR): as European Commission has pointed out, GAAR aims to prevent loopholes that could derive from the absence of specific anti-abusive tools. The rule, replies the one contained in Parent-subsidiary Directive5 but the elements to identify tax abuse differ from the ones formulated by CJEU.

    In this vein, this rule has been criticized as it refers to some notions like “essential purpose” or “valid economic reasons” which legal meaning is not easy to identify and lets wide discretion to Member States in national transposition. Moreover, it adopts a de minimis approach, forcing Member States to ensure a common minimum level of protection but it deviates from CJEU Case-law, causing, therefore, more uncertainty than the one existing before with reference to practical application of anti-avoidance principles. For example, in the judgment 3MItalia6, in matters of non-harmonized direct taxations, the Court stated that the Member States have to prevent abuse only relying on domestic legislation and doctrine: according to the CJEU mentioned case, only if such domestic measures restrict EU freedoms, Member States have to follow European standards, whereas ATAD Directive has a strong impact on direct taxation.

    Looking at art. 6 of ATAD it requires the existence of three different elements to be applied: firstly, it is necessary that the arrangement has been put into place for the main purpose or one of the main purposes of obtaining a tax advantage. ATAD’s GAAR so, overcomes the sole purpose test provided by CJEU7. The arrangement must defeat the object or purpose of the applicable law and be not genuine having regard to all relevant facts and circumstances, imposing an objective and subjective test. Moreover, contrary to Halifax8 judgement that provided in case of law abuse that the transactions should have been “redefined so as to re-establish the situation that would have prevailed in the absence of the transactions constituting that abusive practice”, ATAD does not fix consequences deriving from the existence of an abusive practice, but authorizes the States to ignore the arrangement, letting them free to decide the consequences: it can, therefore, create 28 different anti-avoidance rules that do not help to build certainty.

    In conclusion, it has to be pointed out that tax avoidance strategies need for succeeding to be supported by a certain level of tax certainty that allows taxpayers to predict legal consequences of the rules they apply in their day-to-day transactions. Tax certainty aims to satisfy not only taxpayers’ expectations but also constitutes a guarantee for governments to which will not be possible to object the defence of legitimate expectations to excuse avoidance behaviours. Moreover, as OECD/IFM report has underlined, tax certainty represents a fundamental driver in doing business and have a positive impact on taxpayer behaviour, creating the awareness of paying fair taxes. The multiplication of tax formal requirements, of transparency duties, makes sense only if it does not create an unclear and vague legal framework that contradicts jurisprudential case law or create disparities depending on where businesses are located. In this sense, OECD and EU cannot neglect tax certainty in building tax avoidance strategies and should work according to common standards, coordinating their actions.

    1. CJEU, 5 of July 2012, C-318/10, Société d’investissement pour l’agriculture tropicale SA (SIAT) v État belge.
    2. OECD/IMF, (2017) Report on Tax Certainty, Paris. See also, OECD/FMI, (2018) OECD/IMF Report on Tax Certainty - 2018 Update.
    3. Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches COM/2016/0198 final - 2016/0107 (COD).
    4. Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (2016). OJ L 193/1
    5. Council Directive (EU) 2011/96 of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States.
    6. CJEU, 29 March 2012, C-417/10, Ministero dell’Economia e delle Finanze and Agenzia delle Entrate v 3M Italia SpA.
    7. CJEU, 14 Dicember 2000, C-110/99, Emsland-Stärke GmbH v Hauptzollamt Hamburg-Jonas.
    8. CJEU, 21 February 2006, C-255/02, Halifax plc, Leeds Permanent Development Services Ltd and County Wide Property Investments..
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  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

Enza Sonetti

Enza Sonetti completed her PhD in 2017, with the qualification of Excellent, in Legal Strategy for SMEs from Suor Orsola Benincasa University of Naples and in Law and Political Science from the University of Barcelona. She obtained the license to practise law in Italy and actually works at AGM Abogados - Barcelona. From 2017, she is a member of ILADT (Latin American Institute of Tax Law).

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