By: Rufus Bloh Senyon, LL.M, BBA
The application of the General Anti-Avoidance Rule (GAAR) often raises numerous questions due to its broad and interpretive nature. GAAR focuses on combating “impermissible tax avoidance,” but this term can be subjective and context-dependent. This doctrine is the power that the tax administration has to apply the tax law to the substance of a business while disregarding the inappropriate forms used by taxpayers to obtain unwarranted tax advantage. In other words, the rule typically requires tax authorities to prove that the arrangement was undertaken with the primary intent of avoiding taxes.
The GAAR has been configured through the consummation of two elements, the objective element or the intent of the legislator in the formulation of the law (economic substance) and the subjective element or the intent of the taxpayer. If the main purpose of a transaction is to have an undue tax advantage in a way unintended by the legislator, the transaction can be recharacterized from a tax law perspective. The common questions that arise are: What evidence is required to prove intent? How do authorities determine the “dominant purpose” of a transaction, especially when mixed motives are involved? ; What happens if a taxpayer provides alternative, commercially valid justifications for the arrangement? This research in brief intend to answer the gap in understanding the resolution mechanism between hard law and soft law when there is conflict of laws bordering on constitutional law and international tax law vis a vis the general anti-avoidance rule.
With the GAAR, the problematic issue lies with the legislator’s intentions. This is because, this intention is not defined in any binding legal cradle and therefore presents predictability issues for the taxpayer as it is contended that taxpayers’ rights entailed foreseeability. The profound mind-boggling questions amongst tax scholars had been, are all legislation application unambiguous? What would be the role of the Judiciary if legislation contains no ambiguity? It has been widely accepted norms that legislation may contain unpredictability.
However, from historical antecedent, considering law in contextuality, unpredictability has nothing to do with conformity. The predictability of GAARs has been a point of concern for many years and it continues to be today. Therefore, even though, the studied material may not be clear as to whether or not, the GAARs conform to the rule of law, however, it is this puzzle the research paper seeks to investigate. In this paper, the GAAR is compared with a commonly recognized theory of the rule of law: The eight legal principles proposed by Fuller in his book entitled ‘’The Morality of Law”. In light of Fuller’s test principles, the GAARs pose a problem from the viewpoint of the rule of law. In spite of this, some scholarly writers have argued that GAARs are justified, primarily because they address justice based on collective rights.
Generally, as tax revenues are important for the functioning of the states, the states endeavors to carved tax policy measures for the protection of its tax base. Likewise, corporations formulate financial policy to carry out its business operations for profit maximization. Therefore, taxes serve as important component between the social policy of the state and the financial policy of corporations. This thereby provoked tension between the two policies. This breeding of conflict cannot be overemphasized. Internationally, as there are aggressive tax planning schemes, states have intensified their efforts to counter undesirable tax. In this paper, the research material does not present a clear-cut answer concerning the conformity of GAARs with the rule of law; therefore, arguments are presented on both sides of the coins. Therefore, I propose that one position on this issue is idiosyncratic and largely dependent on what we accept as legal standard.
As sets stated above, there is a potential conflict of laws between Constitutional law and Tax Law, in light of GAAR as a matter of soft law (international law by the OECD), which was incorporated in 2016 under paragraph 1 of article 7 of the Multilateral Instrument (Convention) to Implement Tax Treaty Related Measures to Prevent BEPS (‘’commonly called the MLI’’).
The new international tax order, assumed that in the past, global tax law framework failed to adapt all measures to business developments inherent in the integration of national economies and markets, therefore measures must be implemented now.
Research shows that tax law have had increased infringement on the fundamental rights, the right to property, and these intrusion are of exceptional dangers to occur since the formulation of measures by the new international tax law order as enshrined in the Multilateral Instrument to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (hereinafter referred to as the MLI).
On the other hand, the constitution is a proponent for the protection of basic rights; therefore, there is a potential conflict between hard law (constitutional law) and soft law (international tax law). Firstly, let us look at the resolution mechanism for the adjudication of infringement on fundamental rights from the domestic setting, then secondly, the resolution mechanism provided regarding conflict of laws from international law perspective.
In domestic setting, the constitutional courts have the primary functions to review laws. Thus, questions of intrusion on fundamental rights are best resolved by the constitutional court, and to prevent ultra vires taxes, or to affirm conformity, it should be assessed through constitutionality review. Therefore, in some established case laws, the court have rendered its judgement on the proportionality principle of tax law ensuring the infringement of states into the private spheres of individuals is justified. An example is, the case law of German Federal Constitutional Court on Protection of basic rights and tax law from Oliver Lepsius’ studies.
However, in international law, there are two approaches used for the Settlement (resolution) of conflict between hard law (constitutional law) and soft law (international tax law). State use either the monistic doctrine or the dualistic doctrine. In the monistic doctrine, the international law need not be incorporated or implemented in the domestic law. Once it goes into force it is applicable, that is, tax treaty entered into, or multilateral instrument signed unto, become a binding instrument, there is no need for legislative action. In other words, the principle of lex specialis derogate legi generali (or lex specialis) is applicable in many countries, that is, international instrument signed unto takes priority or supersedes domestic law.
In contrast, dualistic doctrine holds that domestic and international law are two separate legal systems. This means, international law must be ratified before it can be implemented in domestic law to be applicable in domestic legal order. In some situations, some countries apply the legal maxim lex posterior derogate lex priori (lex posterior). If this happens, domestic law may override tax treaty provision. To prevent this, many legal systems, have constitutional protection clauses against violations of international law.
In conclusion, in a dualistic legal order, the OECD MLI which encourages the treaty GAARs (or ‘’PPT), if it is ratified, it is enforceable by the tax administration or if declared in line with the constitution, then the government’s decision to adopt the MLI may actually improve taxpayers’ compliance. Contrary to the monistic doctrine, the OECD MLI once signed unto become automatically binding and enforceable by law.
About
Rufus Bloh Senyon is a driven projects leader, researcher, development focus, transfer pricing expert, policies and an advisor on tax and corporate matters, a strong professional in international income taxation, tax compliance engagements, management accounts preparation, tax audit, with over ten (10) years working experience in various capacities as tax professional, auditor and finance officer. Solid knowledge and Practical experience in comparative and international tax law and income taxation; demonstrated work experience of tax compliance audits; managed advisory projects of transfer pricing and income taxation for multinational companies. I hold BBA in Accounting/Economics and a Master of Laws (LL.M) in International and EU Tax Law from Uppsala University; and various post graduate certificates in projects management.
References
Pettersson, Lennart, Conclusions in International Tax Avoidance and Evasion: Compendium of documents, IBFD, Amsterdam, 1981, page 131; Nowotny, Christian, The Interaction of Financial and Tax Accounting in Schon, Wolfgang, Berlin, Heidelberg, 2008, page 101.
Nugroho, Andrianto Dwi, Harnessing the Link between Constitutional Law and Tax Law through Constitutionality Reviews on the New International Tax Order, page 1.
Ibid.
Nugroho, Andrianto Dwi, Harnessing the Link between Constitutional Law and Tax Law through Constitutionality Reviews on the New International Tax Order, page 1; Oliver Lepsius, ‘Constitutional reviews of tax laws and the Unconstitutionality of the German Inheritance Tax’, (2015) 16 German Law Journal 1191, 1192.
Ibid
Ibid, page 1-2.
Berglund and Cejie, Basis of Comparative Income Taxation from a Methodological Viewpoint, pages 40.
Ibid, pages 40-41.
Berglund and Cejie, Basis of Comparative Income Taxation from a Methodological Viewpoint, pages 40-41.
Ibid
Ibid
Ibid
Nugroho, Andrianto Dwi, Harnessing the Link between Constitutional Law and Tax Law through Constitutionality Reviews on the New International Tax Order, page 1.
Berglund and Cejie, Basis of Comparative Income Taxation from a methodological Viewpoint, 41
