Seminário sobre Regulamentação da Norma Geral Antielisiva Norma Geral Antielisiva e o tratamento da falta de propósito negocial, da falta de substância e do abuso de forma nos negócios jurídicos. A Experiência Italiana Marco Greggi University of Ferrara and European School of Advanced Tax Studies
Understanding the Environment •Lack of business purpose, abuse of law (avoidance, fraus legis, etc.) are faces of a same dice; •In order to understand the Italian experience two key features must be considered: • Cultural aspects of the Legal doctrine; • Technical aspects concerning Taxation law; • A judgemade GAAR, a number of targeted AAR.
Understanding Cultural Aspects: the Law as One •Use of Civil / Roman law concepts to clarify tax law; • What is avoidance ? What is abuse of law ? • it’s the behaviour of “Qui salvis verbis legis, sententiam ejus circumvenit” Dig. 1.3.29; • In other words: “it’s the behaviour of the individual who without infringing the words of the law, deceives the purport thereof”.
Continued: The Law as One •Other axioms of Roman Civil law are fundamental to understand what abuse or avoidance are: • “Fraus legis enim fit, ubi quod fieri noluit, fieri aurtem non vetuit” Ulpianus, Dig. 1.3.30; • Or, in other words “Fraus legis occurs when a certain behaviour is not wanted, without being clearly vetoed (by the legislator) • A violation of a principle without a violation of a rule occurs.
Defining Principles and Rules •The struggle against (Tax) avoidance / abuse of law is therefore based both on: • Rules (specific and tailormade) and ... • ... Principles (general and based not necessarily on the law). •The point becomes: is a principlebased approach to the abuse of law legitimate in the lack of rules ?
The last evidence from Roman Law •During the classic stage of its development the concept of abuse was absurd: • A “digital” approach was adopted: Right vs No Right; • It was not possible to abuse of a right, every abuse was as a matter of fact just an “use”. The master killing a slave was not abusing of its power, but just exercising a right; Then something changed in the law: unreasonable killing of a slave was considered an abuse.
Moving back to Italy. Rules and Principles today •There’s no statutory GAAR ... •... but there’ s a judgemade, principlesbased one; •The principles used are Art. 53 (ability to pay principle) and art. 3 (principle of solidarity) of the Italian Constitution.
Understanding the reasoning by the Supreme Court •Every business operation, every economic decision taken or entered into with the sole (or just main) purpose of saving taxes is a violation of the ability to pay principle an of the duty of solidarity enshrined in the Constitution, requiring everybody to pay (the right amount of) taxes.
PROs and CONs of this approach • PROs: 1. A “catch all” clause; 2. Flexible approach, stronger position of the Tax Office; • CONs: 1. Lack of uncertainty in the business relations; 2. Need for a more intensive use of Rulings and Advanced Rulings; 3. Centrality of the executive power.
The paradox of tax avoidance •In the paradox of Achilles and the Tortoise, Achilles is in a footrace with the tortoise. Achilles allows the tortoise a head start of 100 metres. If we suppose that each racer starts running at some constant speed (one very fast and one very slow), then after some finite time, Achilles will have run 100 metres, bringing him to the tortoises starting point. During this time, the tortoise has run a much shorter distance, say, 10 metres. It will then take Achilles some further time to run that distance, by which time the tortoise will have advanced farther; and then more time still to reach this third point, while the tortoise moves ahead. •Thus, whenever Achilles reaches somewhere the tortoise has been, he still has farther to go. Therefore, because there are an infinite number of points Achilles must reach where the tortoise has already been, he can never overtake the tortoise. •Aristotle, Physics.
From Theory to Practice th •Art. 37 bis, Decree 600 issued on September 29 1973 is the statutory AAR which is currently the most similar to a GAAR, covering Direct taxes: • “Contracts operation, business combinations, deeds or even facts taken individually or in conjunction are of no relevance for the tax administration when the are deprived of any sound business purpose or are aimed at: (1) circumventing obligations or prohibitions established by the law or (2) obtaining tax reductions, holidays or reimbursement that would be otherwise denied.”. • Then follows a list of cases where this rule is applicable, making it a NON general anti avoidance rule.
From Theory to Practice (Part 2) th •Art. 20, Act n. 131 issued on April 26 1986 concerning the Registration tax; • Every contract, deed or act must be registered taking into account the substance of it, considering neither the form adopted by the parties nor the qualification of the contract chosen by them. • A clear example of “substance over form” principle and of the fact that different taxes uses different anti avoidance rules.
The Dimension of the Phenomenon •Supreme Court Decisions 12249/10; 12353/05, 13261/99, 30055/08, 30057/08, 12042/09, and more ... • All of them use either directly or indirectly the concept of “abuse of law” as a sort of GAAR; • In some cases they apply it to a single contract, in some other to a business combination, or to a series of contract taken as a whole ...
Example n°1: (Inheritance) Tax Planning •Under italian inheritance law, when somebody dies all the properties and assets are transferred to relatives (spouse, sons, daughters, ...) according to the law and to the will/testament • An inheritance tax is applied but a reduction to the taxable base (a sort of tax holiday) is applied according to the relation between the dead and the beneficiary of the testament.
Example n° 1: continued •In the case of parentson relation the deduction is € 500.000 (example), in the case of brother sister is 100.000; • The acceptance of the will is not automatic, but id depends on the consensus of the beneficiary, that must be given in a number of months; • If the beneficiary dies before he can express his consensus (or refusal) this option passes to the heir ...
Defining the abuse •Can sister n° 2 (in black) refuse the inheritance on behalf of the (dead) sister in order to enjoy the higher tax deduction ? • In the Italian IRS (Ruling issued on 2009) point of view this is a case of “Abuse of law” and the second sister has to accept on behalf of the other.
Example n° 2: Supreme Court 4737/10 •A soccer player enter into a contract with an Italian soccer club “I”; •However, he attributes all the right concerning the exploitation of his image to a company “A” resident in a low tax jurisdiction; • Subsequently, “A” sells the right to another company of the group “I” belongs to.
Example n°2 : the Decision of the Court •For the Court, this is a clear example of “massive” abuse of law, encompassing the use of: • A stepstone company; • A subjective simulation (actually, the concept of stepstone company as it is sometimes qualified by Civil lawyers); • An objective simulation, concerning the sale of rights to company “A”, aimed at a tax deferral and to the implementation of a taxsavings scheme.
Example n° 3: Avoidance, Abuse and Real Estate Tax •Setting the scene: • Italy has a Real Estate Tax (ICI) regulated by statute 504/92: • It is applied to all the real estates (buildings, houses, flats, land, ...); • Some exemptions occur, including: religious buildings, “first home”, ..., all the land which is in an “ancillary” relationship with another real estate; • In the latter case, the real estate pay ICI and the land does not.
Example n° 3: some more clarifications •The case of an Hotel and a parking area around it: • The owner of both pays Real estate tax on the value of the hotel. He doesn’t pay on the value of the parking area since it is used for the Hotel (it’s “ancillary” to it). • The “ancillarity” of something to something else is mainly decided by the taxpayer, particularly in case of business activity. • The entrepreneur knows what he needs for his business (instruments, assets, goods) and must be left free to organize his business accordingly. • But ...
Example n°3: business freedom and abuse •A company owns two area suitable to be used for building purposes • On one of the two, it actually built a palace, paying ICI (Real estate tax) on it; • The other is left (temporarily) unbuilt and considered “ancillary” to the first one: no tax is therefore paid on that.
Example n° 3: Supreme Court 25127/09 •The taxpayer’s decision in this case is “abusive”; •There’s no reason to consider the second area (even if adjacent to the first one and left unused, or used as parking) as “ancillary” • In deciding what is “ancillary” to a business activity the entrepreneur is not entirely free, but must exercise his freedom consistently with the principles of reasonableness and fair use of law.
Example n°4: on sale and lease back operations F Trieste Venice S Ships sold under a “sale and lease back scheme”
Example n° 4: the circumstances of the case •Companies “F” and “S” belong to the same group; •Company “F” enjoys a preferential tax regime; •Company “S” is is active in the “on sea transportation” business • “S” sells the ships used to the controlling company under a “sale and lease back scheme”.
Example n° 4: the characteristics of the contract •No Transfer Pricing issues; • Reason 1: the TP rules are applicable to crossborder operations only; • Reason 2: the prices are at market’s value •... but a significant tax saving via Trieste’s special tax regime.
Example n° 4: Supreme Court 10082/02 •The “sale and lease back” operation in this case has no economic purpose; •There are no reasons for company “S” to sell assets that it is currently using and buy back in leasing; • Freedom of business activity is protected by the Constitution (art. 41) but in this case and abuse of this freedom occurs.
Example n° 5: the so called “Piaggio Dahiatsu” case •Supreme Court Decision 1465/09; •The “abuse of law” doctrine / sound business purpose doctrine find their limits (... by now); • Important to emphasize an aspect that has been underestimated: the procedure, the burden of proof and the dialogue between taxpayer and IRS before the reassessment.
Example n° 5: the circumstances of the case Dahiatsu P&D Phase 1Piaggio
Example n° 5: Phase 2 •P&D purchases machineries for the production of minivan and lease them to Piaggio for free; •Piaggio uses its workers and factories to produce minivan and sells them to P&D; •P&D applies on them the Dahiatsu trade mark (plus some other minor customizations) and sells them back to Piaggio and Dahiatsu; •Piaggio and Dahiatsu sell the minivans on the market.
Example n°5: the quest for a business purpose •IRS: no business purpose and abuse of business freedom; •IRS: P&D is not an active company, it cant deduct interest, depreciation rates for the machinery purchased, royalties paid to Dahiatsu for the use of trade marks, know how and logos.
Example n° 5: making sense of a Joint venture •In the circumstances of the case the P&D joint venture was incorporated in the framework of a sound business purpose; •It permitted to reach sensible costs cut for both Piaggio and Dahiatsu; •THe reduction of the tax burden is therefore a side effect only of the overall operation; •And more ...
Example n°5: conclusions •The concept of “abuse of law” must be used taking into account the overall business operation, and not (only) the single step transactions; •A single decision could be “abusive” if taken individually, but reasonable if considered in a wider framework; • It’s a IRS’s duty to consider this situation ... • It’s a taxpayer’s duty to demonstrate that IRS is wrong and the entire business was sound and reasonable.