International Tax Avoidance - The Tension between Protecting the Tax Base and Certainty of Law

Journal of Business Law, Issue 7, September 2011

18 Pages Posted: 20 Mar 2011 Last revised: 10 Oct 2011

See all articles by Craig Elliffe

Craig Elliffe

University of Auckland - Faculty of Law

Date Written: March 16, 2011

Abstract

Global business does its tax planning on an international and multi-jurisdictional basis. Tax Authorities however have remained sovereign and focused on their own tax base. Current economic conditions have sharpened this focus to an acute extent. Tax authorities respond to international tax planning by having recourse to domestic general anti-avoidance rules (GAARs) or other judge made anti-avoidance rules.

This article is an enquiry into this response of countries to the problem of international tax avoidance. When the OECD’s Commentary categorises countries, it divides them into a dichotomy, saying that anti-avoidance rules are applied in either a factual or interpretative way. It is suggested that this is confusing. It would be more helpful to categorise countries on the basis of overriding law; namely, do treaties override the GAAR, or vice versa?

By analysing seven jurisdictions on this basis of overriding law, three categories of countries emerge. First, those countries that place most importance on their domestic anti-avoidance provisions overriding the treaty; these countries value most their ability to preserve the tax base and strike down abusive transactions. Secondly, those countries that place more importance on their treaties overriding the domestic GAAR; these countries value most the certainty of law. The last category of countries has hybrid features, so that although the domestic GAAR will normally operate on cross-border transactions and override the treaty, in situations where the treaty conflicts with the GAAR, the treaty will prevail and override the domestic anti-avoidance provisions. The conclusion reached is that this third category of countries that has the best policy approach. This is because this approach encourages certainty of law where two sovereign states have expressly concluded an agreed position in a treaty, supporting public international law, but also permits the use of the domestic GAAR when the use of the treaty is not robustly an intended outcome and the treasury coffers are at risk.

Keywords: international, tax avoidance, GAAR, certainty of law, factual and interpretative, domestic law overriding treaties

JEL Classification: K34

Suggested Citation

Elliffe, Craig Macfarlane, International Tax Avoidance - The Tension between Protecting the Tax Base and Certainty of Law (March 16, 2011). Journal of Business Law, Issue 7, September 2011. Available at SSRN: https://ssrn.com/abstract=1787843

Craig Macfarlane Elliffe (Contact Author)

University of Auckland - Faculty of Law ( email )

Private Bag 92019
Auckland Mail Centre
Auckland, 1142
New Zealand

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