Economic Substance Doctrine: Time for a Legislative Response

6 Pages Posted: 24 Feb 2008 Last revised: 8 Dec 2009

See all articles by Amir Pichhadze

Amir Pichhadze

University of Oxford

Aviv Pichhadze

affiliation not provided to SSRN


As a general rule, an effective strategy for combating tax avoidance within an income tax system is to require that market transactions have an economic substance. The administration of this principle, however, has given rise to constitutional and institutional dilemmas in the U.S., the U.K., and Canada. During the 20th century, judges in these countries have sought to intervene (to various degrees and at different stages) in the battle against tax avoidance by contributing to the application and development of the economic substance doctrine, but this judicial activism has created concerns about the intervention of the judiciary in deciding what types of transactions should require economic substance - a role that institutionally belongs to the legislature.

In this article, we identify an important shift in judicial attitude during the early part of the 21st century in Canada, the U.K., and the U.S., and the implications of this shift to future reforms in this area. We note that when the government fails to state its policy objectives, the judiciaries in these jurisdictions demonstrate reluctance and/or difficulty in filling in the gaps by making decisions about when transactions should require economic substance, and instead are leaving it to the legislatures to indicate when and if this requirement applies. The implication of this observation vis-¿-vis new and emerging judicial attitudes is significant given that it puts new pressures on the legislature: If the legislature is no longer able to rely on the courts to make these decisions to effectively administer the doctrine, the legislature will have to require the doctrine by statute. That is, the legislature will have to transform the doctrine into a generally applicable anti-avoidance rule and express it in a clear and unambiguous manner.

Keywords: Economic Substance, Tax, Anti-Avoidance, US, Canada, UK, Comparative

JEL Classification: H26, H7, H87, K34, K41, K42

Suggested Citation

Pichhadze, Amir and Pichhadze, Aviv, Economic Substance Doctrine: Time for a Legislative Response. Tax Notes International, Vol. 48, No. 1, October 2007, Available at SSRN:

Amir Pichhadze (Contact Author)

University of Oxford ( email )

Aviv Pichhadze

affiliation not provided to SSRN

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