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GAARs and Judicial Anti-Avoidance in Germany, the UK and the EU - Schriftenreihe IStR Band 98
Preface
5
List of abbreviations
16
A. Introduction
21
1. Background
21
2. Terminology
21
2.1. Tax evasion
21
2.2. Tax avoidance and tax mitigation
22
3. Scope of the study
24
3.1. Point of departure
24
3.2. Bringing GAARs into play
25
4. The comparative approach and the research question
26
5. Structure of the study
29
B. Judicial anti-avoidance
30
1. Introduction
30
2. Judicial anti-avoidance in Germany
31
2.1. Introduction
31
2.2. The traditional view: Formal and literal interpretation
32
2.3.Major tax reform
33
2.3.1. Adoption of the “economic perspective” and introduction of a GAAR
33
2.3.2. Consequences of the reform
35
2.3.2.1. Counteracting abuse using the GAAR
35
2.3.2.2. Counteracting abuse by way of interpretation (and other means)
36
2.3.2.3. The tax reform was successful
39
2.4. Further development
39
2.4.1. National Socialist excesses under the guise of statutory interpretation
39
2.4.2. Developments after 1945: (re-)adoption of the “economic perspective”
41
2.4.3. The “economic perspective” as a means of teleological interpretation
42
2.4.4. The status quo: Sec 42 Fiscal Code
44
2.4.4.1. Introduction in 1977
44
2.4.4.2. Amendment in 2001
45
2.4.4.3. Amendment in 2008 and present state
45
2.5. The legal relevance of Sec 42 Fiscal Code
47
2.5.1. Two ways to deal with abuse
47
2.5.2. The concept of Innentheorie
48
2.5.3. The concept of Außentheorie
50
2.5.4. Tax law and the mechanism of analogy
50
2.5.5. More than just two theories
52
2.5.6. Regarding the controversy and function of Sec 42 Fiscal Code
55
3. Judicial anti-avoidance in the UK
59
3.1. Introduction
59
3.2. The traditional view: Literalism and formalism (The Duke of Westminster)
59
3.2.1. The pillars of the Duke of Westminster
59
3.2.2. The Duke of Westminster
61
3.2.3. The Duke of Westminster put to the test
63
3.2.4. Literal interpretation and form vs. substance: A myth is born
65
3.3. The interim view: The uncertainty of Ramsay
67
3.3.1. Initial remarks
67
3.3.2. Artificial, circular and self-cancelling transactions: W.T. Ramsay Ltd. v IRC
68
3.3.2.1. Facts of the case and the taxpayer’s view
68
3.3.2.2. Two ways to deal with the case
68
3.3.2.3. The House of Lords’ approach
69
3.3.2.4. The House of Lords’ alternative suggestion
70
3.3.3. Ramsay confirmed: IRC v Burmah Oil
71
3.3.3.1. Facts of the case and the taxpayer’s view
71
3.3.3.2. The House of Lords’ approach
72
3.3.4. Step transaction test: Furniss v Dawson
74
3.3.4.1. Facts of the case and starting situation
74
3.3.4.2. Ramsay as a transaction based anti-avoidance approach
74
3.3.4.3. The impacts of Furniss v Dawson
76
3.3.5. Ramsay at a dead end: Craven v White
77
3.3.5.1. Facts of the cases
77
3.3.5.2. Limiting the impacts of Ramsay
78
3.3.5.3. Ramsay as an approach to statutory construction?
79
3.4. The status quo: Ramsay as an approach to statutory interpretation
79
3.4.1. The rediscovery of statutory construction: McGuckian v IRC
79
3.4.1.1. Facts of the case and the taxpayer’s view
79
3.4.1.2. The House of Lords’ approach
80
3.4.2. Ramsay as a principle of statutory construction: MacNiven v Westmoreland
83
3.4.2.1. Facts of the case and the taxpayer’s view
83
3.4.2.2. The House of Lords’ approach
83
3.4.3. Ramsay as a principle of statutory construction confirmed: BMBF
85
3.4.3.1. Facts of the case and the taxpayer’s view
85
3.4.3.2. The House of Lords’ approach
86
3.4.4. Statutory construction can be difficult
88
3.4.4.1. Making use of various methods of interpretation
88
3.4.4.2. Mayes v HMRC (“SHIPS 2”) as a reason for the introduction of the GAAR
91
3.4.4.3. HMRC v DCC Holdings: What if?
95
4. Judicial anti-avoidance in the EU
97
4.1. Introduction
97
4.2. Development of an abuse test
99
4.2.1. Emsland Stärke
99
4.2.2. Was it necessary to set up an abuse test?
100
4.2.2.1. The pillars of Emsland Stärke
100
4.2.2.2. Different approaches?
104
4.2.2.3. There was no need to set up an abuse test in Emsland Stärke
106
4.2.3. Implications of the abuse test
106
4.2.3.1. No influence in the short run
106
4.2.3.2. No influence in the short run also in the field of VAT
110
4.2.3.3. Very influential in the long run
112
4.3. Abuse in the field of VAT
114
4.3.1. Halifax
114
4.3.1.1. Facts of the case and questions referred to the Court
114
4.3.1.2. Adopting the abuse test in the field of VAT
114
4.3.1.3.There was no need to adopt the abuse test
115
4.3.1.4. Implications of the objective test
117
4.3.1.5. Implications of the subjective test
118
4.3.2. Cases adopting the Halifax abuse test
119
4.3.2.1. Part Service and Weald Leasing
119
4.3.2.2. Objective test and tax advantage
121
4.3.2.3. Subjective test
122
4.3.2.4. Legal consequences
124
4.3.3. New focus: Wholly artificial arrangements in the field of VAT
124
4.3.3.1. Change of focus
124
4.3.3.2. Wholly artificial arrangements in respect of the relevant statute
125
4.4. Abuse in the field of direct taxation
129
4.4.1. Cadbury Schweppes
129
4.4.1.1. Facts of the case and questions referred to the Court
129
4.4.1.2. Question of justification or question of scope?
130
4.4.1.3. Preventing the creation of “wholly artificial arrangements”
133
4.4.1.4. Proportionality of the restriction and no subjective test
134
4.4.2. Shifting the emphasis towards proportionality
138
4.4.3. Bringing Halifax and Cadbury Schweppes together
139
4.4.4. Further development of the case law
140
4.4.5. New focus: Wholly artificial arrangements in primary law
142
4.4.5.1. Requirements for a restriction to be proportional
142
4.4.5.2. The Court’s approach in Cadbury Schweppes and Thin Cap
143
4.4.5.3. The Court’s approach in further cases
144
4.5. A uniform concept of abuse?
148
C. Comparison of the GAARs
151
1. Introduction
151
2. The way to the GAARs and identifying common elements
152
2.1. The way to the GAAR in Germany
152
2.1.1. The GAAR has a long lasting history
152
2.1.2. Statutory requirements and the courts’ approach
152
2.2. The way to the GAAR in the UK
154
2.2.1. The failed attempt to introduce a GAAR in the late 1990s
154
2.2.2. Aaronson Report
155
2.2.2.1. Background of the Aaronson Report
155
2.2.2.2. Main findings of the Aaronson Report
156
2.2.2.3. General Anti-Avoidance Rule or General Anti-Abuse rule?
158
2.2.2.4. Aaronson’s GAAR
159
2.2.3. The UK GAAR
159
2.2.3.1. Introduction of a general anti-abuse rule
159
2.2.3.2. Statutory requirements
160
2.2.3.3. The importance of the GAAR Guidance
161
2.3. The way to the GAAR in the EU
162
2.3.1. The pillars of the EU GAAR
162
2.3.1.1. CCCTB Proposal: The first EU GAAR initiative
162
2.3.1.2. Article 80 CCCTB and the influence of the ECJ
164
2.3.2. The EU GAAR
165
2.3.2.1. Recommendation of an EU GAAR
165
2.3.2.2. Requirements of the EU GAAR
165
2.3.2.3. Practical importance: The EU GAAR and domestic GAARs
166
2.3.2.4. Practical importance: The EU GAAR and the PSD GAAR and the BEPS GAAR
167
2.4. Identifying common requirements
169
2.4.1. Overview of the common requirements
169
2.4.2. The idea behind the various requirements
170
3. Arrangements covered
172
4. Taxes covered
173
5. Objective test
175
5.1. Common elements
175
5.2. The objective test in the German GAAR
176
5.2.1. Starting point
176
5.2.2. Leaving the application of Sec 42 Fiscal Code open
177
5.2.3. Using Sec 42 Fiscal Code as a starting aid
179
5.3. The objective test in the UK GAAR
182
5.3.1. Starting point
182
5.3.2. Indicators of abuse
183
5.3.2.1. Indicators of abusive arrangements (Sec 207 (4) FA 2013)
183
5.3.2.2. Indicator of a non-abusive arrangement (Sec 207 (5) FA 2013)
185
5.3.3. Drawing the line between use and abuse: Examples of the GAAR Guidance
187
5.3.4. Examples where the GAAR does not apply
187
5.3.4.1. The arrangement is in line with the statutory requirements
187
5.3.4.2. The “contrived or abnormal” arrangement is in line with the statutory requirements
189
5.3.5. Examples where the GAAR applies on grounds of Sec 207 (2) (a) FA 2013
191
5.3.6. Examples where the GAAR applies on grounds of Sec 207 (2) (c) FA 2013
194
5.3.6.1. Further development of the law
194
5.3.6.2. The GAAR and Mayes (SHIPS 2)
196
5.3.6.3. Counteracting arrangements using the instruments of teleological reduction and analogy
197
5.3.7. Lessons learnt from the examples
199
5.3.7.1. The importance of the various GAAR elements
199
5.3.7.2. The objective test as an approach to statutory interpretation
200
5.3.7.3. The objective test as a reminder of having to properly interpret the law
201
5.4. The objective test in the EU GAAR
202
5.4.1. The objective test is not flawless
202
5.4.2. The objective test will be applied differently
203
5.5. Conclusion: An objective test can be valuable
205
6. Subjective tests
205
6.1. Common elements
205
6.1.1. Subjectivity in the German GAAR
205
6.1.2. Subjectivity in the UK GAAR
206
6.1.3. Subjectivity in the EU GAAR
207
6.1.3.1. Starting point
207
6.1.3.2. The EU GAAR reveals weaknesses
207
6.1.4. Subjectivity is present on various layers
210
6.2. Arrangement test
210
6.2.1. What it is about and the difference from the objective test
210
6.2.2. (In)appropriateness: The arrangement test instead of the objective test
211
6.2.2.1. Starting point
211
6.2.2.2. Inappropriate and appropriate arrangements
211
6.2.2.2.1. Non-tax reasons to rebut the inappropriateness
211
6.2.2.2.2. Arrangements that have the effect of offsetting or cancelling each other
214
6.2.2.2.3. Overall plan
216
6.2.2.2.4. Interposition of persons
217
6.2.2.2.5. Arrangements and the expectation of a reasonable business conduct
221
6.2.2.3. The arrangement test must be rejected
223
6.2.3. Artificiality: The arrangement test in addition to the objective test
224
6.2.3.1. Starting point
224
6.2.3.2. “Artificial”
225
6.2.3.3. The arrangement test must be rejected
226
6.3. Purpose test
227
6.3.1. Main or essential purpose…
227
6.3.2. … of the arrangement or the person?
229
6.3.3. The purpose test must be rejected
231
6.4. Tax advantage
233
6.4.1. The idea behind the tax advantage
233
6.4.2. The presence of the tax advantage
233
6.4.3. The subjectivity of the tax advantage
236
6.4.4. Requiring a tax advantage must be rejected
237
6.5. Double-reasonableness test
238
6.5.1. What is it about
238
6.5.2. The double-reasonableness test must be rejected
240
6.6. Conclusion: Subjective tests must be rejected
240
6.6.1. Summary of the critique
240
6.6.2. Solution
242
7. Legal consequences
244
7.1. Basing taxation on a fictional arrangement
244
7.2. Reconstruction poses serious problems
247
7.3. Consequential adjustments
248
D. Valuation of the GAARs
251
1. Introduction
251
2. Judicial anti-avoidance
251
2.1. Points of departure in the UK and in Germany
251
2.1.1. Resembling starting positions: The legal form is decisive
251
2.1.2. Contrasting developments: Various methods of interpretation vs. literal interpretation
252
2.1.2.1. Tax reform in Germany
252
2.1.2.2. No action taken in the UK
254
2.1.2.3. Developments around the Second World War
255
2.1.2.4. Developments in the post-war years
256
2.1.3. Reasons for these divergent developments
258
2.1.3.1. The relationship of tax law with other fields of law
258
2.1.3.2. Liberalism and social reasons
259
2.1.3.3. Victorian values and background of the judges
260
2.1.3.4. Common law and influence of academics
262
2.1.3.5. Parliamentary sovereignty, legal certainty and the rule of law
263
2.1.4. Consequence: Different drafting of tax legislation
265
2.2. EU Law: Adding another layer of complexity
267
2.2.1. Abuse was a latecomer in EU law
267
2.2.2. Judicial anti-avoidance in European law
268
2.3. All roads lead to Rome
270
2.3.1. Counteracting abuse on grounds of a judicially developed GAAR?
270
2.3.1.1. The initial uncertainty of Ramsay and the concept of Außentheorie
270
2.3.1.2. Ramsay did not develop into a judge-made GAAR
273
2.3.2. Counteracting abuse as a matter of interpretation?
274
2.3.2.1. Common elements: Transaction based anti-avoidance
274
2.3.2.2. Germany: Counteracting abuse should only be a matter of interpretation
276
2.3.2.3. UK: Counteracting abuse is a matter of interpretation
278
2.3.2.4. EU: Counteracting abuse should return to a matter of interpretation
279
2.3.3. Development of similar ways to counteract abuse by interpretation
280
2.3.3.1. Summary
280
2.3.3.2. Influence of other countries on the UK
282
2.3.3.3. Influence of the ECJ on UK courts
283
2.3.4. Substance-over-form and the economic perspective (wirtschaftliche Betrachtungsweise)
285
2.3.4.1. Substance-over-form approach from a German court’s perspective
285
2.3.4.2. Economic perspective (wirtschaftliche Betrachtungsweise) from a UK court’s perspective
286
3. Statutory anti-avoidance (GAARs)
289
3.1. Common elements inherent in the GAARs
289
3.2. Drawing the line between “abusive” and “non-abusive” arrangements
290
3.3. The GAARs only codify what courts already did
291
4. Reasons for introducing and suggesting the GAARs
292
4.1. To raise revenue and for political reasons
292
4.2. To compensate legislative cowardice
295
4.2.1. Overly complex tax systems as a source of tax avoidance
295
4.2.2. Tax systems do not have to be ‘perfect’
297
4.2.3. GAARs as a result of legislative cowardice
298
4.3. To compensate judicial and administrative shortcomings in statutory interpretation
299
4.3.1. Methods of interpretation and the complexity of the tax system
299
4.3.2. Applying various methods of interpretation can be difficult
301
4.3.3. GAARs as a tool to compensate shortcomings in interpretation
303
5. What remains at the end?
304
5.1. What is claimed to be achieved
304
5.2. What is achieved
305
5.2.1. GAARs leading to a simpler tax system?
305
5.2.1.1. A GAAR alone does not make the tax system simpler
305
5.2.1.2. Legislators may contribute to the simplification of a tax system
306
5.2.2. GAARs reducing the uncertainty surrounding the case law?
310
5.2.2.1. Uncertainty is a result of overly complex tax systems
310
5.2.2.2. GAARs can contribute to legal uncertainty and inequality
311
5.2.3. GAARs can be detrimental to the legal culture
313
5.2.3.1. The finding of an abusive arrangement is a matter of interpretation
313
5.2.3.2. GAARs may have an adverse effect on the legal culture
314
5.3. Is there even a remaining scope for GAARs?
316
5.3.1. GAARs as reminders of having to interpret the law
316
5.3.2. Making interpretation possible
318
E. Summary
320
1. Starting position
320
2. The courts’ approach
320
3. The GAARs’ approach
328
4. Valuation of the GAARs
333
F. Annex
338
1. Overview of the common requirements of the German, UK and EU GAAR
338
2. German GAAR (author’s translation)
339
2.1. Sec 4 and 5 Reich Fiscal Code
339
2.2. Sec 6 Fiscal Adjustment Act
339
2.3. Sec 42 Fiscal Code in the version of 1977and 2001
339
2.4. Sec 42 Fiscal Code in the version of 2008
340
3. UK GAAR
340
4 . EU GAAR
347
4.1. EU GAAR: Commission Recommendation on Aggressive Tax Planning
347
4.2. PSD GAAR
348
4.3. BEPS GAAR
348
G. Bibliography
350
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