Tax Avoidance Revisited: Exploring the Boundaries of Anti-Avoidance Rules in the EU BEPS Context
Benn Folkvord, Professor at the University of Stavanger, Norway
I. The Meaning of Avoidance and Aggressive Tax Planning and the BEPS Initiative
1) The Meaning of Tax Avoidance in National Legal Systems
Norwegian law includes a number of different rules regarding tax avoidance. There are two general anti-avoidance rules (GAARs): one statutory rule and one case law rule. There are also several special anti-avoidance rules (SAARs) which will be discussed later. In practice, Norwegian GAAR case law has had the greatest significance.
Tax avoidance refers to tax-motivated transactions. It is defined somewhat differently in the statutory norm as compared with the case law norm. The Norwegian Supreme Court has defined tax avoidance that is subject to the non-statutory GAAR as follows:
"The Substance Over Form Rule – which has been developed in both case law and theory – consists of a basic premise and an overall assessment. The basic premise is that the primary objective of the disposition must have been to save taxes. This is a necessary, but not a sufficient, condition for applying substance over form. Application of substance over form rules also requires that it, based on an overall assessment of the effects of the disposition (including its intrinsic commercial value), the taxpayer's objective in making the disposition and the circumstances in general, seems adverse to the objective of the tax rules to use the disposition as a basis for taxation."[1]
The threshold for applying the statutory anti-avoidance rule is presumably lower, while the scope is narrower. This statutory anti-avoidance rule is defined as follows in Section 14-90 of the Norwegian Income Tax Act:
"This section deals with companies or groups as mentioned in Section 2-2, first and second subsections, and that have tax positions that are not linked to asset or debit items. When such companies, etc. are parties to a reorganisation pursuant to Chapter 11, or if their ownership changes as a consequence of such reorganisation or other transaction, and it is likely that exploitation of the general tax position is the predominant motive for the transactions, Position A shall lapse if it represents a tax advantage, or Position B shall be entered as income without the right to offset against deficits if it represents a tax liability."
The anti-avoidance rules are also applied in a fairly comprehensive administrative practice, first and foremost statements by the (Norwegian) Directorate of Taxes. These are binding advance rulings in specific published cases. In formal terms, such rulings have little or no value as sources of law; however, they may have great significance in practice. In principle, such rulings only apply to one specific case. If the Directorate of Taxes states that it is of the opinion that a transaction is not subject to the anti-avoidance rules, all Norwegian tax authorities will accept this type of transaction without asserting that it contravenes the anti-avoidance rules.
Tax avoidance is one of the areas which has the most decisions from the Norwegian Supreme Court. Generally, the Supreme Court will only hear a few of the cases that are appealed, normally only cases that involve matters of fundamental significance. As the Norwegian anti-avoidance rules are formulated with a very substantial degree of discretion, it is difficult to ascertain exactly where the lines are drawn as to when these rules should be applied. This gives rise to many cases where it is unclear whether or not the tax authorities can utilise anti-avoidance. There are also many cases in which various aspects of the rules must be clarified. Not least, the Supreme Court will often adjust the avoidance rules, and there has been considerable variation in how strict the rules have been. The Supreme Court decisions are very important, both as regards application and development of the rules – substantially more important than the legislator's activity.
In spite of a fairly comprehensive catalogue of Supreme Court case law and extensive legal literature on this topic, the scope and content of the anti-avoidance rules are somewhat unclear. This is linked to the discretionary content of the rules, as well as to moderately inconsistent decisions by the Supreme Court. The Supreme Court has been criticised for this in professional literature.
The anti-avoidance rules are applied at all administrative levels. At the first level, the tax authorities must determine whether or not transactions are covered by the rules. This may then be followed by an appeal to a superior administrative body, before the matter is brought before the courts of justice.
International rules have relatively little impact on Norwegian anti-avoidance rules – at least not directly and openly. The Norwegian Supreme Court very rarely refers to international sources. It is more unclear whether international law has had a more indirect impact.
So far, the BEPS project has had little effect on Norwegian anti-avoidance rules, but the more indirect effect is also less than clear. A regulatory commission has proposed that the non-statutory Norwegian GAAR should be signed into law. There are a number of reasons for this; in part the fact that the case law rules have been too unclear; and in part that the Supreme Court is thought to be too liberal. It is also possible that the BEPS work has had an impact.[2] There is reason to believe that BEPS will gain significance over time. Most likely, BEPS will have limited significance for the general anti-avoidance rules. There is much to indicate that BEPS will have the greatest impact in relation to the special rules (SAARs).
A regulatory commission has proposed introducing Norwegian withholding tax on royalties. The proposal refers to the BEPS work, and must be assumed to have drawn inspiration from this work.[3] There is no authority under Norwegian law for taxing royalties – a fact which has led to major opportunities for adaptation.
When it comes to the use and abuse of hybrid companies, the Norwegian legislator also refers to the BEPS project. There is more of a wait-and-see attitude here, and it must be assumed that BEPS could also have significance here. The commission that has worked on these rules has clearly stated that one should await the conclusion of the BEPS work.[4]
As regards establishment of a fixed place of business, NOU 2014:13 Item 7.5.5. also concludes that reforms are needed, as the current rules are vulnerable to tax planning. The commission believes that one should await the conclusion of the BEPS project, and follow the recommendations that will be forthcoming.
Reference is also made to the BEPS project as regards exchange of information, and it is recommended that the recommendations be followed also in this case.[5]
As illustrated above, it is suggested that the BEPS recommendations should be followed on a number of issues. The extent to which this will actually be carried out has not yet been resolved. Traditionally, the Norwegian Ministry of Finance has been very slow to introduce SAARs, also in relation to well-known, often used and fairly clear circumventions of the rules. However, it may seem that a shift in practice is under way here, meaning that the Norwegian authorities will become more active.
2) The Meaning of Tax Planning, Abusive Tax Planning and Aggressive Tax Planning in National Legal Systems
There are no legal definitions of Tax Planning, Abusive Tax Planning and Aggressive Tax planning in Norwegian law. This is due to the fact that the boundary between legal and illegal tax planning is subject to discretionary assessment; which complicates such definitions.
If the requirements for applying the national GAAR are fulfilled, the transaction in question will not be accepted by the tax authorities and the taxpayer will not achieve tax advantages. The decisive factor is thus a clarification of whether or not these requirements have been met. The existence of abusive or aggressive tax planning does not constitute grounds for applying GAAR. However, in practice, aggressive tax planning and abuse are subject to the Norwegian GAARs – although this is not a direct or formal requirement.
As shown above, the court-made Norwegian GAAR can only be used if two conditions are met. First, only tax-motivated transactions can be affected. An overall assessment of the transaction must also be made. Key elements of this overall assessment will naturally include the degree of abuse and aggressiveness. The Supreme Court does not always state this directly, but one must nevertheless assume that these are key elements – which have no distinct legal clarification.
There is fairly comprehensive administrative practice as regards application of the Norwegian anti-abuse rules. However, this practice also lacks a clear definition of what is meant by tax planning, aggressive tax planning or abusive tax planning. Nevertheless, it is neither natural nor necessary to provide such definitions, as it does not constitute a requirement for applying the rules.
It has not been generally established that the rules are applied or developed with any notable differences by administrative bodies or courts of justice. On the other hand, there have been instances where Norwegian courts of justice disregard administrative practice concerning application of the anti-avoidance rules.
One example: it recently became clear that so-called "packaging" is accepted.[6] As a main rule under Norwegian law, shares owned by a company can be sold tax-free. Sale of other items, such as real property, will trigger taxation of capital. It was long assumed that splitting out a piece of real property into a dedicated single-purpose company, and then selling the shares in said company rather than selling the property directly, could be subject to the Norwegian GAAR. This was rejected by the Norwegian Supreme Court, and it is now considered to be clarified that this type of transaction must more or less always be accepted by the Norwegian authorities.
There is considerable overlap between the areas of application for the various anti-avoidance concepts in Norwegian law. The two GAAR standards in Norwegian law have the same basic condition for application. Under the court-made rule, an overall assessment of the transaction must also be carried out. However, the statutory norm only applies to certain types of transactions, typically mergers, share sales, etc. One might have expected that the statutory GAAR, which only requires one specific condition for application, would be used in practice. The opposite is the case. In the clear case of published cases, the legislator and courts of justice use the non-statutory and for the taxpayer more liberal, unpublished GAAR. There may be several reasons for this. One important reason is probably that the statutory rule can essentially only be applied to specific and delimited transactions. The statutory GAAR provides much less leeway than the non-statutory variant, for viewing many transactions – transaction chains – in context.
The rules are criticised. It has been asserted that there should be a common GAAR with the same requirements for all types of transactions. It is difficult to understand why one should have a stricter statutory GAAR that only applies to certain types of transactions. The legislator's explanation is that a particularly strict GAAR is appropriate for certain transactions, as avoidance is more practical in such cases. This reasoning has been criticised. The grounds cited for the criticism is that there are no good reasons for dealing with avoidance that is less common more liberally than avoidance that is more common.
International sources, including domestic law in other countries, appear to have had little impact on Norwegian case law and Norwegian administrative practice. Nor does OECD practice appear to have had any significant impact. The indirect significance of these sources is more unclear, but there is little to indicate that such sources have substantial significance. There may be many reasons for this: Norwegian tax and excise law is comprehensive and complex. It is likely that one has only limited knowledge of international sources. Also, Norwegian legal tradition is such that there is only a limited opportunity to emphasise international sources of law in the clarification of national law.
One exception from the above is the application of the anti-avoidance rules in the tax treaties. There, great emphasis is placed on the OECD's comments and practices surrounding them. This is also required under Norwegian legal traditions. These sources are key elements – often quite decisive elements – in the application of international law.
II. The Reaction to Avoidance and Aggressive Tax Planning in the BEPS Context
1. Domestic General Anti-Avoidance Rules (GAARs)
Norway is not a member of the EU, which means that EC Recommendation C-(2012) 8806 of 6 December 2012 is of less significance.
Under the Norwegian GAAR, a fundamental condition is that transactions must be tax-motivated. According to the EU's recommendation from 2012, a GAAR is meant to apply to tax-motivated transactions; however, it is also required that these transactions must be in an artificial arrangement, or a series of artificial arrangements. The requirement concerning artificial arrangements is not present under the Norwegian GAAR. The Norwegian GAAR requires a discretionary overall assessment of the transaction. A key element here is whether the transaction contravenes the objective of the tax rules.
The degree to which an artificial arrangement is present will be a key element in an overall assessment, also according to Norwegian law. The significance of this element seems to vary somewhat in a not entirely consistently formulated Supreme Court practice.