Since the OECD started the well-known BEPS project—tackling Base Erosion and Profit Shifting—over a decade ago, combating tax abuse has been a prominent focus. Legislators are tightening national regulations, the OECD and the EU are introducing and refining various provisions, treaty drafters are including anti-abuse clauses in tax treaties, and increasingly, tax courts are faced with the question of whether there is an abuse of (tax) law. Does this mean that taxpayers are behaving increasingly badly? I don’t think so; the reason is mainly that societal views are changing. In the past, one could cheerfully boast at parties about having outsmarted the tax authorities, often receiving much admiration and the question of how exactly it was done, so others might also benefit. This was true for individual taxpayers as well as for small and large enterprises. However, particularly among large corporations, it was not transparent, nor were they flaunting it.
It is clear that those days are behind us: boasting about cheating the tax authorities often leads to a negative reaction. Rightly so, because evading taxes means not only cheating the tax authorities but especially fellow citizens. What one pays less, another will have to pay more. Government spending, after all, remains the same. Tax avoidance generally means that you technically comply with the tax rules in a given situation, but there is still a question of whether such a situation aligns with the law and especially the intent of the law. According to our highest court, the rule still applies that a taxpayer may always choose the most favorable tax solution for themselves, but within the legal framework. However, the law is not always clear. You simply cannot cover all conceivable situations with a statutory rule, let alone future developments that the legislator cannot foresee. There are certainly plenty of those.
That said, the main question for the government is: how do I combat tax avoidance? On a side note, combating tax evasion—fraud—is primarily a matter of thorough control of taxpayers by the tax authorities, including careful examination of tax returns and regular, effective audits. These are often lacking. Partly, this can be addressed through a ‘smart’ control mechanism where AI may play a useful role in the near future. Regarding combating tax avoidance, it is significantly more challenging. This is due to two reasons. First, tax avoidance must be detected by the tax authorities. This is often not easy. The taxpayer will not report it, and it is usually not easy to find in the tax return or financial statements. But a second problem may be even greater: when does tax avoidance occur? And then there's a third problem: the burden of proof primarily lies with the tax authorities. Regarding the latter, it is the case that the more unusual and contrived a construction is, the greater the share the taxpayer has in the burden of proof to convincingly demonstrate that there is no avoidance. The aforementioned second problem consists of the criteria for tax avoidance, nowadays often referred to in everyday language as abuse of law, aligning somewhat with the long-standing concept of fraus legis. Simply put, this occurs when actions are contrary to the purpose and intent of the law (objective standard) with the sole or predominant motive of avoiding taxes (subjective standard). Both must, in principle, be proven by the tax authorities. Regarding the first criterion, a common problem is that the purpose and intent of the law are not always clear. I already mentioned that the legal text is not always clear, and the same applies to the explanation. To say nothing of cases where the explanation and legal text do not align well. In short, a challenging exercise that can become even more complicated when international rules such as treaties and European regulations come into play. A few years ago, the European Court made an important ruling on this issue. In that case, dividends from Denmark were ‘rerouted’ to the United States via a Luxembourg company, saving 15% in dividend tax. The European Court struck it down because it constituted abuse of law and ignored the intermediary company. In the Netherlands, a case is currently before the Supreme Court involving mutual gifts of €100,000, known as cross-donations. Neither party financially benefited—one gave a gift, but simultaneously received a gift—but gifts were made with the intent to take advantage of a certain high gift exemption. However, the tax authorities put a stop to it, claiming it was fraus legis. The Advocate General opined that this indeed was the case, although he also saw another route for combating it, but that aside. The Supreme Court has not yet ruled, but I find it plausible that it will follow the Advocate General's advice. As mentioned, financially, nothing ultimately happens. It cannot be the legislator’s intention for gift exemptions to apply to these payments. There were no other reasons for the 'gifts'.
Overall, it is clear that this doctrine of combating abuse will continue to receive significant attention in the coming years. On one hand, it is unfortunate that it is necessary, but on the other hand, it is obviously good that undesirable constructions are tackled with all possible means. The legislator has an important role in proper formulation, and the tax authorities in effective control.
Peter Kavelaars is a Professor of Tax Economics at Erasmus University Rotterdam and of counsel at Deloitte Dutch Caribbean.
Tobias is a Junior Manager in Deloitte’s Tax service line.