General Anti-Avoidance or Abuse Clause (GAAR): its genesis and evolution in Tax Law. Legal certainty

This clause is the power that the tax administration has to apply the tax regulations to the substance of the business, leaving aside the inappropriate forms used by taxpayers through which they have obtained an undue tax advantage.

While for some authors and laws the avoidance or abuse is configured through the consummation of the objective element (taxable event of an economic nature) and the subjective element (the intention)[1], for others only the objective element is sufficient[2].

  1. Denominations

The general anti-avoidance or anti-abuse principle, doctrine[3] or clause has received many names according to its class or variant applied in each country. This is how it can be mentioned: the principle of economic reality, of economic interpretation, substance over form, the reason for business, the principle of profit, legitimate nature of the business, doctrine of economic substance, simulation, of multiple acts, fraud of the law, abuse of legal forms, abuse of the law, theory of the new realism, theory of valid economic motives, etc.

It should be noted that, although it is the same doctrine, it has different characteristics in each country, as indicated by Watson (1993)[4], since the use by a country of the concept of another country does not imply that it is interpreted or evolved the same way.

Internationally, this clause has been called GAAR (“General Anti-Avoidance Rule”), generally covering abusive maneuvers, and it is distinguished from the SAAR (“Specific Anti-Avoidance Rule”), insofar as these apply to a specific status of a specific tax.

  1. Initial codification

In 1919, the German Tax Ordinance created a general anti-avoidance rule in its Art. 4° by establishing: “In the interpretation of tax laws, their purpose, their economic significance and the development of circumstances must be taken into account[5].” It was duly implemented by France (1941), Spain (1963) and Italy (1990).

This normative tide became internationalized and reached, among others, the beaches of South Africa (2006), China (2008), Indonesia (2008), and India (2016).

  1. The jurisprudential creation

In the “Dalloz Sirey” case (1867) the French Court of Cassation made it possible for the tax administration to review transactions to discover the true nature of a contractual agreement[6].

For its part, in the United States in the case “Higgins v. Smith” (1940), the anti-abuse doctrine of “substance over form” was developed, inasmuch as if the business was fictitious or simulated, the administration could dispense with it in order to apply the purpose of the tax rule.

The principle of business reason or the principle of profit (“business purpose test”) was also adopted in the case Gregory v. Helverin (1940) and that of complex operations or multiple transactions (“step transactions”).

This doctrine was extended to the United Kingdom under the name “New Realism” in the 1980s and was applied in the “Ramsay” case (1982). In the Netherlands (1984) it was applied by the Supreme Court calling it “fraus legis”[7]. For its part, the Court of Justice of the European Union in the case “Halifax” (2006) considered as abuse of the law an artificial construction that has as an essential objective to avoid taxes, and in the “Cadbury-Schweppes” (2006) case, applied the so-called “theory of valid economic motives[8].”

  1. The new denomination

Thus, in the USA[9]  in 2010 the economic substance doctrine was introduced into the “Internal Revenue Code”, which was a surprise due to the long tradition of jurisprudence. This milestone was followed by the United Kingdom in 2013 when it introduced a general anti-abuse rule in the “2013 Finance Act”, which began to be applied in 2017 and which is aimed at abusive tax planning that seeks to obtain tax advantages through an “unreasonable act”.

OECD (2015) proposed its implementation in the BEPS framework, as did the EU in 2016[10].The project was called the Directive against tax avoidance /” Anti-tax Avoidance Directive” (ATAD).

  1. The Latin American experience

In LA, the first country to apply it was Argentina (1946), influenced by Germany by incorporating the principle of economic reality in the Tax Procedure Law[11]. Another impulse was provided by the Model of the Tax Code for Latin America (1967)[12], which incorporated it into its regulations.

This antecedent was followed by other countries[13] (Costa Rica, Ecuador, Guatemala[14], Paraguay, Peru, the Dominican Republic, Uruguay). Meanwhile, in others, its application was rejected (Brazil, El Salvador, Honduras, Nicaragua) or it was the reason for its exclusive creation through jurisprudence (Mexico).

From the year 2000, the dynamism of its codification changed and thus, among others, was carried out by Brazil (“economic interpretation” 2001), Venezuela (2001), Bolivia (2003), Ecuador (2005), Colombia (2012), Chile (“Nature of the business” 2015) and Mexico (“business reason” 2020).

  1. Lessons learned: legal certainty

The application of the anti-avoidance clause has in practice entailed a high level of litigation, with the clear damage that it generates both for the actions of the tax administration and for business planning by taxpayers. This lack of legal certainty could be resolved if the anti-abuse norms included the minimum essential elements that are generally controversial in the courts due to the gray or empty areas of laws. These include:

  • The acts involved (transaction, preparations, promise, plan, understanding, commitment, etc.),
  • The inclusion of multiple transactions (act, legal or joint business, including past and future),
  • The definition of tax benefit (any exemption, reduction, deferral, etc.)[15], such as the moment of its obtaining (immediate or future),
  • The purpose or intentionality (objective or subjective element)[16],
  • The economic reality (its application is the most important factor, beyond the legal forms and structures used),
  • The determination of the tax consequences (rejection of the applied benefit, extension of the adjustment to taxpayers involved outside the transaction, specific penalties, etc.).
  • Special procedure to determine abuse or circumvention with objective criteria (panel or committee reports at administrative level, judicial declaration, etc.).
  1. Synthesis

Since the last century, the evolution of the general anti-abuse clauses has been permanent (in the jurisprudence and as codified or reformed by many countries), and will undoubtedly continue that way, considering the latest international events. Experience indicates that the greater the regulatory precision, the lower the litigation, and the greater the legal certainty in this essential issue of tax law.

[1]RUIZ ALMENDRAL, Violeta and SEITZ, Georg (2004): ” El fraude a la ley tributaria”, Estudios Financieros, Nos. 257-25, “… the only purpose, or the main one, is to reduce the tax burden.”
[2] JARACH, Dino (1971) “El Hecho Imponible. Teoría General del Derecho Tributario Sustantivo”. Abeledo-Perrot “… whether or not there is an intention to evade the tax and whether this criterion is favorable to the Treasury or the taxpayer.”
[3]It should be noted that the British Courts in the Barclays ruling (2004) held that in the “Ramsay” case (1982) a new theory of fraud had not been created, but simply had rescued the British tax law from literality.
[4]Alan Watson argued that although the rules are easily transferred (“legal transplant”) from one country to another, their understanding and development can be very different. A. Watson, “Legal Transplants: An Approach to Comparative Law”, University of Georgia Press, pp. 97-99 (1993).
[5]El principio de la “Realidad Económica” en el Derecho Tributario. Revista de Derecho Económico (2010. Dr. Efrén Minuche Zambrano.
[6]“Comparing the General Anti-Avoidance rule of income tax law with the civil law doctrine of abuse of law”, John Prebble QC and Zoe M Prebble Victoria University of Wellington Legal Research Papers, Paper No 133/2017 (2017).
[7]“The ATAD general anti-avoidance rule in the Netherlands”, Ivo Kuipers, Fiscalité Internationale, 2020.
[8] Christian Anguita Oyarzún (2017) “Los Retos en la Aplicación de las Cláusulas Antiabuso por las Administraciones Tributarias Latinoamericanas y las Lecciones de la Experiencia Española y Europea”, CIAT, IEF, AEAT.
[9] “La codificación de la doctrina de la sustancia económica en EE.UU. como nuevo modelo de norma general anti-abuso: la tendencia hacia el sustancialismo”, José Manuel Calderón Carrera y Violeta Ruíz Almendral Quincena, Fiscal 15-16, Madrid (2010).
[10]“Tax Avoidance Rules Increase the Compliance Burden in EU Member Countries”, Sebastian Dueñas, Daniel Bunn, Tax Foundations (2019).
[11]Its application is currently invigorated in the recent ruling of the CSJN “Molinos Río de la Plata” (09/2/2021).
[12]Editors: Ramón Valdés Costa (Uruguay), Carlos María Giuliani Fonrouge (Argentina) and Rubén Gomes de Souza (Brazil) OAS / IDB Project.
[13] “Las Cláusulas Generales Anti Elusivas en América Latina y los intereses de los contratantes en la causa de los contratos”, Ángel Marco Chávez Gonzáles, Advocatus/31, Students of the Law School of the Universidad de Lima.
[14]In Guatemala, it was declared unconstitutional on July 11, 2013 (Ruling 1898-2012)
[15]In India, as a singular characteristic, the tax benefit obtained must exceed an amount.
[16]Proof to the contrary is generally accepted. The Australian GAAR does not support it.

 

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