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Explore how EU law, including TFEU and direct tax directives, combats tax avoidance and abuse. Learn about key principles and ECJ rulings to prevent abusive practices in taxation.
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Anti – Avoidance Measures EU Law Alina ARMENIAEuropean Commission DIRECTORATE-GENERAL TAXATION AND CUSTOMS UNION
Sources of EU tax anti-avoidance rules • Treaty on the functioning of the European Union (TFEU); • EU direct tax directives; • State aid rules; • Member States have adopted the Code of Conduct by which they undertook a political commitment to eliminate harmful tax measures within the EU; • Commission's communications
1. TFEU • the internal market - an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured; • prohibits discrimination and restriction on the free movement rights; • precludes differences in tax treatment discriminating against foreign (non-nationals), non-resident and resident taxpayers involved in cross-border activities, unless objectively justified.
ECJ • Scope of the fundamental freedoms; • The need to prevent tax avoidance/tax abuse as a justification for restrictions;
ECJ • Restriction of the free movement rights • i.e. tax legislation provides for a difference in tax treatment of domestic and cross-border activities; • Examines whether the restriction may be justified by overriding reasons of general interest, inter alia: the prevention of tax avoidance/tax abuse • Proportionality test: • – tax rules at issue are suitable for attainment of the aim; • – rules at issue do not go beyond what is necessary for attainment of the aim.
KEY PRINCIPLES • Emsland-Stärke C-110/99, §52-53; Halifax C-255/02, §74-75 An abuse occurs only where, despite formal observance of the conditions laid down in the relevant EU rules, their purpose is not achieved and there is an intention to obtain an advantage by artificially creating the conditions for obtaining it.
KEY PRINCIPLES • 3M, C-417/10, §31 The general EU principle of abuse of rights has to be taken together with the possible justification of such a restriction on the grounds of the need to prevent abusive practices. • abuse of rights in the field of direct taxation derives in particular from Cadbury Schweppes and Test Claimants in the Thin Cap Group Litigation when it comes to freedom of establishment, from Jobra when freedom to provide services is at stake and GlaxoWellcomeregarding free movement of capital.
ECJ • - cross-border anti-avoidance rules targeted • solely at cross-border activities might constitute restrictions on free movement rights that could be justified by the need to prevent tax abuse or tax avoidance, provided that the proportionality test is met.
Cadbury Schweppes, C-196/04, §65,66 The objective of minimising one's tax burden is in itself a valid commercial consideration as long as the arrangements entered into with a view to achieving it do not amount to artificial transfers of profits. The tax savings motive test was no longer deemed essential to the EU concept of direct tax abuse, since it was applicable only to wholly artificial arrangements.
Cadbury Schweppes, C-196/04, §67,68 An establishment is to be regarded as genuine where, based on an evaluation of objective factors which are ascertainable by third parties, in particular evidence of physical existence in terms of premises, staff and equipment, it reflects economic reality, i.e. an actual establishment carrying on genuine economic activities and not a mere "letterbox" or "front" subsidiary.
Thin Cap, C-524/04 Terms and conditions of financial transactions between related companies resident in different MSs deviate from those that would have been agreed upon between unrelated parties constitutes an objective and independently verifiable element for the purpose of determining whether the transaction in question represents, in whole or in part, a purely artificial arrangement.
Thin Cap, C-524/04 • Legislation framed on that basis was proportionate on condition that the taxpayer was given the opportunity to provide evidence of any commercial justification for the arrangement.
Thin Cap, C-524/04, AG Geelhoed opinion, §67 • it must be possible for a taxpayer to show that, although the terms of its transaction were not arm’s length, there were none the less genuine commercial reasons for the transaction other than obtaining a tax advantage (i.e. the need to decrease the cost of a bank loan, and granting a loan from the parent company); • if such commercial reasons are put forward by the taxpayer, their validity should be assessed on a case by case basis to see whether the transactions should be seen as wholly artificial designed purely to gain tax advantage; • the information required to be provided by the taxpayer in order to rebut the presumption should not be disproportionate or excessively difficult or impossible to provide;
Thin Cap, C-524/04, AG Geelhoed opinion, §67 • in cases where the payments are found to be abusive (disguised distributions) in the above sense, only the excess part of the payments over what would have been agreed on arm’s length terms should be re-characterised as a distribution and taxed in the subsidiary’s state of residence accordingly; and • the result of such examination must be subject to judicial review
SIAT, C-318/10, §55 • wholly artificial arrangements; • paying for services which were never actually provided; • the domestic legislation has to give the taxpayer an opportunity, without subjecting it to undue administrative constraints, to provide evidence of any commercial justification that there may have been for that arrangement. • presumptions that the mere fact that the service was not carried out by a provider resident in the same country as the taxpayer cannot lead to the conclusion that the transactions are not genuine and proper.
SIAT, C-318/10, proportionality • a complete and automatic reverse burden of proof that would solely be carried by the taxpayer without the tax authority being required to provide even prima facie evidence of tax evasion or avoidance is disproportionate; • the ECJ further linked proportionality to other concepts of EU law such as legal certainty; • rules of law must be clear, precise and predictable as regards their effects.
Wholly artificial arrangements #ITELCAR, C-282/12 #Fred Olsen and Others, (EFTA) E-3/13 A substance-over-form analysis; The application of the principles flowing from the case law will, ultimately, depend on the facts of particular cases.
2. EU direct tax directives; • Directive 2011/96/EU (PSD) • Directive 2003/49/EC (IRD) • Directive 2009/133/EC (MD)
Anti-abuse rules in the Directives Allow Member States to: • withdraw the benefits of the directive or refuse to apply the directive (Art. 5(2)IRD) and/or • apply domestic or agreement based provisions required for the prevention of fraud or abuse to cases falling within the scope of the directives Art. 1(2) PSD and art. 5(1) of the IRD
EU direct tax directives - ECJ • Leur-Bloem, C-28/95; • Kofoed, C-321/05; • Modehuis A. Zwiijneburg BV, C-352/08; • Foggia, C-126/10
DIRECTIVE 2015/121 of 27 January 2015 Article 1(2) is replaced by the following paragraphs: ‘2. Member States shall not grant the benefits of this Directive to an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. 3. For the purposes of paragraph 2, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 4. This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of tax evasion, tax fraud or abuse.’
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