Containing Tax Avoidance: Anti-Avoidance Strategies

1 Introduction

Traditionally the topic of tax avoidance, or how to contain it, has not been a central focus of the public finance literature.[2] Indeed, the Fifth Edition of Public Finance in Theory and Practice[3] does not mention tax avoidance at all and only makes the briefest mention of tax shelters in the contexts of interest quarantining and the US alternative minimum tax.

This omission is slightly surprising given that tax avoidance, like tax evasion, has been around as long as tax itself and can have a major impact on so many aspects of public finance. But the lack of any major attention in the literature in the second half of the twentieth century may not be so surprising when one considers that it is only relatively recently that avoidance and evasion have become the major social phenomena that they now are. The general conclusion of commentators in the UK, the US and elsewhere[4 ] is that tax avoidance activity has really only grown significantly in recent decades. Revenue authorities readily concur as to the recent heritage. As noted in a recent South African Revenue Service (“SARS”) Discussion Paper on Tax Avoidance,[5] the growth in tax avoidance activity is a worldwide concern and “has been a growing problem internationally during the past ten years”.

An army of what Tanzi[6] and Braithwaite[7] have respectively called fiscal and moral termites has been eating away at tax revenue bases throughout the world in an unprecedented fashion over the last thirty or so years, and with increasing vigour in the last decade. It is therefore appropriate that the topic of tax avoidance – and more particularly of how it can be constrained or contained – should be a key aspect when tax reform in the twenty first century is under consideration in this colloquium.

The paper initially explores (in Section 2) the nature of avoidance activity, the reasons for its growth, and the reasons why we should be concerned, in order to provide appropriate background and context. It then considers, in turn, administrative (Section 3), legislative (Section 4) and judicial (Section 5) responses to concerns about tax avoidance activity. The separation of the review into these three convenient areas is somewhat arbitrary, as they are far more integrated and interdependent than such separation suggests. Section 6 offers some concluding thoughts.

The principal objective of the paper is to identify, examine and evaluate some of the key trends in the responses that national governments and international organisations are currently making to the problems of tax avoidance. The conclusion is that national tax authorities, international tax organisations, and national and supranational legislatures and judiciaries, have at their disposal a large range of anti-avoidance strategies that are designed to deal, and are generally capable of dealing, with the onslaught of these so-called fiscal and moral termites. Moreover, there is some Evidence[8] that the battle being waged against widespread tax avoidance is tilting in favour of the defenders of the fisc. But while perhaps there is no need for fiscal or moral panic, there is no room for complacency either.

2 Tax avoidance: background

What is tax avoidance?

Tax avoidance comes under many labels. In Australia it is often referred to (particularly by the Australian Tax Office – “ATO”) as “aggressive tax planning”;[9]in South Africa as “impermissible or abusive tax avoidance”;[10 ] in New Zealand and the United Kingdom as “unacceptable tax avoidance”;[11]and in the US terms such as “tax abusive shelters” are often used. Whichever term is used, tax avoidance is often contrasted with tax evasion, and also with tax planning/mitigation.

The distinction between tax evasion and tax avoidance is well recognized. It is the difference between working outside the law and working within the law (though against its spirit).[12 ] The former Chancellor of the Exchequer in the UK, Denis Healey, suggested that “the difference between tax avoidance and tax evasion is the thickness of a prison wall”.[13] The OECD notes that tax evasion involves “illegal arrangements through or by means of which liability to tax is hidden or ignored …[such that]… the taxpayer pays less tax than he is legally obligated to pay by hiding income or information from the tax authorities”.[14 ] But the OECD finds it more difficult to offer such a precise definition for tax avoidance, suggesting, “somewhat awkwardly”,[15]that tax avoidance is “an arrangement of a taxpayer’s affairs that is intended to reduce his liability and that although the arrangement could be strictly legal it is usually in contradiction with the intent of the law it purports to follow”.[16]

The distinction between (unacceptable) tax avoidance and (acceptable) tax mitigation/planning is generally recognised as not being as clear as the distinction between avoidance and evasion. There is a great deal of legislation in all countries prompted by the distinction, and the proliferation of litigation in the area of specific and general anti-avoidance provisions suggests that many of those legislative provisions have not hit their targets. This distinction between tax avoidance and tax mitigation was referred to in the Willoughby case,[17]where Lord Nolan stated:

“The hall mark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hall mark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option.”

Thus, it is probably reasonable to conclude that tax planning or tax mitigation is “concerned with the organisation of a taxpayer’s affairs (or the structuring of transactions) so that they give rise to the minimum tax liability within the law without resort to…impermissible tax avoidance…”.[18]

Note, however, that seeking to allocate tax evasion, avoidance and planning/mitigation into neat compartments can over-simplify the position. Not only are the boundary lines between these three concepts not always clear, but some very learned commentators have even cast doubt on the helpfulness of such categorisation. For example, in the McNiven v Westmoreland case, Lord Hoffmann has noted that unless the statutory provisions “contain words like ‘avoidance’ or ‘mitigation’, I do not think that it helps to introduce them”.[19] In a somewhat different context, Lord Walker of Gestingthorpe has noted that a “simple tripartite classification [of] tax evasion – illegal and criminal; tax avoidance – legal but unacceptable; tax mitigation legal and acceptable….is too crude an analysis to promote understanding of what is a fairly complex subject”.[20]

How is tax avoidance characterised?

It is possible to characterise tax avoidance activity in any number of ways. For example, one can consider avoidance in relation to its goals, to the nature of its activities, or by reference to its key features.

Goals of tax avoidance

Getting to the essence of tax avoidance perhaps requires an understanding of its goals

– what tax avoidance sets out to achieve. Clearly the end game is a reduction of tax liability, but that can take a number of forms. It is possible to identify four possible goals that underpin tax avoidance activity: elimination; deferral; re-characterisation; and/or shifting.[21]

The first possible goal – the permanent elimination of a tax liability needs no further explanation, and is presumably the tax avoider’s nirvana.[22] Deferral involves the postponement of the payment of a tax liability, and relies on the concept of the time value of money for its effectiveness.[23] Re-characterisation is simply the conversion of the character of an item or transaction – for example from a taxed or a highly taxed item like revenue to a tax exempt or less heavily taxed item like capital.[24] The fourth possible goal – shifting – can relate to income or profit shifting (as in shifting a liability from a highly taxed entity to a less heavily taxed or even exempt entity[25]) as well as value shifting[26]where value is shifted between assets.

Achievement of any or all of these goals is only possible because of the potential for tax leverage or tax arbitrage that arises as a result of the so-called inconsistencies and discontinuities that exist within national tax jurisdictions and across international tax borders. Of course the inconsistencies and discontinuities that are evident within and between tax systems are not likely to disappear – they exist for very good reasons. Distinctions between, for example, debt and equity, or capital and revenue, or between the assessability of different sorts of entities and different levels of income are fundamental parts of national tax systems, and they exist for both policy and political reasons. But we have to be aware of the consequences. As Jeff Waincymer points out: “[p]rogressive rates of taxation encourage income-splitting techniques; tax expenditures in favour of activities deemed worthy of encouragement lead to the creation of tax-inspired shelters; …administrative necessities such as limiting the taxing exercise to a particular period encourage manipulations of the timing of deductions and receipts of income streams”.[27]

The techniques of tax avoidance

Having identified the goals, and appreciating that these goals are achieved through manipulation of the mismatches within and between tax systems, identifying the various contemporary techniques for tax avoidance is not a difficult task – although that is not in any way to under-estimate the ingenuity of their design or the complexity of their construct that is so often a feature of such schemes.

Lord Walker of Gestingthorpe, in an unpublished paper[28] presented shortly after the decision in the Ramsay case[29]was handed down by the House of Lords, identified “seven types of tax avoidance”, proceeding from the simplest case to the increasingly complex (and to most observers, increasingly objectionable). These were:

1. using a relief;

2. finding a gap;

3. exploiting (or abusing) a relief;

4. anti-avoidance karate (by which he meant the capacity for taxpayers to turn to their own advantage statutory provisions designed to prevent tax avoidance);

5. unnatural assets or transactions;

6. pre-ordained transactions; and

7. dodgy offshore schemes.

Many would argue (as Lord Walker readily concedes) that the first is not tax avoidance at all – that it falls squarely within the realms of tax mitigation. Professor Willoughby, for example, was not engaged in an elaborate or contrived scheme aimed at tax avoidance. As the judgment in his case clearly shows,[30]he was involved in the utilisation of a tax regime enacted by Parliament which provided tax deferral for bona fide long term retirement saving. But before it is readily concluded that “using a relief” should not figure in any taxonomy of avoidance, it might be worth bearing in mind that the more recent House of Lords case of Barclays Mercantile,[31] which did involve an elaborate and contrived scheme, was – at essence – simply about a finance leasing company taking advantage of a relief (in this case, capital allowances) that Parliament had intended to be of benefit to such companies. The fact that the taxpayer in both Willoughby and Barclays Mercantile was successful does not mean that simply “using a relief” can be readily discarded from Lord Walker’s hierarchy of avoidance techniques.

And by the same token (again conceded by Lord Walker) not all offshore schemes are by any stretch of the imagination worthy of the label of “dodgy”.

The key features of tax avoidance

Many techniques share a series of common characteristics, most of which are very competently summarised in the paper on tax avoidance prepared in late 2005 by the South African Revenue Service.[32] In the view of that revenue authority the “badges” or “hall marks” of avoidance typically include any or all of the following features:

  • the lack of economic substance (usually resulting from pre-arranged circular or self-cancelling arrangements), with the result that an apparently significant investment proves ultimately to be illusory, and, through various devices, the taxpayer remains insulated from virtually all economic risk, while creating a carefully crafted impression to the contrary;
  • the use of tax-indifferent accommodating parties or special purpose entities, often referred to in the jargon as “washing machines”;
  • unnecessary steps and complexity, often inserted to prop up a claim of business purpose, or to disguise the true nature of a scheme or “as a device to cloak the tax shelter transaction from detection”[33];
  • inconsistent treatment for tax and financial accounting purposes;
  • high transaction costs;
  • fee variation clauses or contingent fee provisions;
  • the use of new, complex financial instruments such as derivatives, hybrids and synthetic instruments which have made it possible for promoters to mimic almost perfectly the risks and returns attributable to more traditional financial instruments such as equity shares or “plain vanilla” debt without incurring, at least in theory, the tax consequences typically associated with them; and
  • the use of tax havens, particularly in the context of captive insurance companies, captive finance subsidiaries and intangible property holding companies.

Of course this is not to suggest that the existence of these characteristics, either alone or in combination, must necessarily point to the existence of tax avoidance activity. That conclusion can only be drawn after a careful consideration of all of the facts. But it is to suggest that, prima facie, the existence of these features, alone or in combination, may indicate avoidance activity.

The Anti-Avoidance Group (“AAG”) of Her Majesty’s Revenue and Customs (“HMRC”) in the UK has developed a similar list of “signposts”, identifying the factors that it considers may indicate avoidance.[34] These include

  • Transactions or arrangements which have little or no economic substance or which have tax consequences not commensurate with the change in a taxpayer’s (or group of related taxpayers’) economic position. For example, forex matching abuse where the position is flat in economic substance but the benefit of hindsight can be used to choose which of two equal and opposite positions is taxed.
  • Transactions or arrangements bearing little or no pre-tax profit which rely wholly or substantially on anticipated tax reduction for significant post tax profit. For example dividend buying where the value of foreign tax credit more than offsets a pre-tax loss; and contrived gilt strip losses counterbalanced by gains on exempt assets such as options.
  • Transactions or arrangements that result in a mismatch such as: between the legal form or accounting treatment and the economic substance; or between the tax treatment for different parties or entities; or between the tax treatment in different jurisdictions. For example a transaction where a payment is treated as an expense in one jurisdiction but the corresponding receipt is not taxable income in another jurisdiction.
  • Transactions or arrangements exhibiting little or no business, commercial or non-tax driver. For example film schemes which create tax losses in excess of the genuine commercial investment.
  • Transactions or arrangements involving contrived, artificial, transitory, pre- ordained or commercially unnecessary steps or transactions. For example the use of artificial arrangements designed to take assets out of the inheritance tax regime while allowing the former owner to continue to enjoy the benefits of ownership.
  • Transactions or arrangements where the income, gains, expenditure or losses falling within the UK tax net are not proportionate to the economic activity taking place or the value added in the UK – especially where the transactions or arrangements are between associates within the same economic entity and would not have occurred between parties acting at arm’s length and/or add no value to the economic entity as a whole. For example the transfer of ownership of an income stream from a UK resident company to an associated company resident in a low/no tax jurisdiction in circumstances where the economic activity giving rise to the income does not accompany the transfer of ownership and/or where no economic benefit accrues to the economic entity as a whole.

Why has tax avoidance become more prevalent?

Many reasons for the growth of avoidance activity in the latter part of the twentieth century and early part of this have been advanced in the literature. Braithwaite[35] has identified globalisation, increasing deregulation and changes in market forces as principal causes. Indeed, Braithwaite positions his work squarely within a broader market context. He shows how the waves of aggressive tax planning in Australia and elsewhere have initially been supply driven. It is his contention that a relatively small group of promoters, including some acting out of major financial institutions and more latterly the (now) Big Four accounting firms, have been the driving force behind many of the schemes that have been adopted by taxpayers in Australia and elsewhere. Much the same point is made by Richards, who notes “the conventional wisdom is [that] most of the planning and mass marketing emanates from the accounting firms”.[36]

There is also little doubt that the supply of tax avoidance products in the market place has been fuelled by the availability of talented human resources prepared to work in the area and by “rapid advances in computer and telecommunications technology [which have] greatly enhanced the ability of investment banks, accounting firms and other tax advisers to create sophisticated tax and financial models…to market…to multiple taxpayers”.[37]

This abundance of supply has, in turn, created a demand for aggressive tax planning opportunities from a much larger group of taxpayers, who feel that they should not miss out on what the ‘big end of town’ is able to enjoy. As Pederick[38] noted many years ago: “[c]ynicism grows apace and a race not to be left out of the tax minimisation derby, by hook or by crook, infects the body politic”.

The US Treasury[39]has noted that changing attitudes may play a large part in the growth in corporate tax shelters in recent decades. It is simply a reflection “of more accepting attitudes of tax advisers and corporate executives toward aggressive tax planning”. And the demand is not merely now restricted to those at the top end of town. For example, the growth in the mid to late 1990s of mass-marketed tax avoidance schemes pedalled by the “white shoe brigade”[40]to high income blue collar workers operating in the resources sectors in the remoter parts of Australia has shown that tax avoidance activity is now a much more comprehensive and extensive phenomenon than was the case in earlier years. That observation is not confined to Australia.

Is the growth in tax avoidance activity a problem?

The question does, of course, need to be asked as to whether all of this growth in avoidance activity needs to be a matter of concern. The answer to this question is relatively straightforward. In the first place, and perhaps most importantly, it impacts negatively on the capacity of national tax jurisdictions to collect the revenue needed for the proper discharge of governmental functions. Revenue collection is the primary function of any tax system, and systematic and widespread avoidance activity will clearly have an adverse impact on that function. There are no reliable estimates on the losses to national treasuries as a result of avoidance activity, but the amounts are likely to be very significant. For example, one estimate has suggested that tax haven activity alone has resulted in annual revenue losses to other countries in excess of US$50 billion.[41] In the UK, the tax loss from avoidance is estimated to run into several billion pounds across both direct and indirect taxes.[42] When tax revenues do not flow as anticipated, or when large amounts of expected revenue are diverted by successful avoidance activity, cuts in government expenditure will follow, “with the resulting social and political difficulties that such cuts may bring”.[43]

But the harmful effects of tax avoidance activity go well beyond their impact on revenue collections. They also significantly affect the efficiency and equity of tax systems. These impacts are neatly encapsulated by Bankman[44] where he notes that “[t]ax shelters siphon off resources from more productive ventures, redistribute the tax burden and threaten to undermine compliance”. As the OECD has also noted, any “proliferation of arbitrary and contrived schemes…leads to a perception that the system is unfair [which can] discourage compliance, even by taxpayers that had not previously engaged in…tax avoidance”[45] It should also not be forgotten that much of the complexity of modern tax systems is a direct result of the introduction of specific integrity measures, involving convoluted anti-avoidance legislation designed to counter real and perceived avoidance abuses.

It can, therefore, safely be concluded that the growth in tax avoidance activity is a matter of grave concern, as it can reduce revenue collections, introduce economic inefficiencies by distorting economic behaviour, undermine the integrity of national tax systems and introduce a host of additional and unwanted complexities to those systems.

The next sections of the paper review the various anti-avoidance responses that have emerged from national governments and international organisations, and identify the key strategies that have been put in place in attempts to contain and counter avoidance activities. The analysis begins with a consideration of what might be termed tax authority responses – looking in particular at the work of national and international revenue agencies. It then considers legislative and judicial responses. While administrative, legislative and judicial responses are considered separately for the purposes of the paper, it must be emphasised that in practice they are closely intertwined and interdependent.

In addition it needs to be acknowledged that other forces are also at work to counter some of the effects of avoidance. For example, lower tax rates may be associated with declining avoidance activity, and so international pressures for the reduction in tax rates since the 1980s may well have played some part in countering avoidance. Revenue authorities have also become increasingly conscious of the importance of providing incentives, or “compliance carrots”, to the great majority of taxpayers who do wish to comply with their tax obligations, rather than simply beating taxpayers with the various sticks that are available to them. This theme of cooperative compliance is mentioned but not fully developed in the paper which, by its nature, is not focused on the compliant.

3 Tax authority strategies to counter avoidance

National initiatives

National revenue authorities have been very active in ensuring that their administrative machinery is as well-positioned as it possibly can be to identify and counter what they regard as unacceptable tax avoidance activity. Even the most cursory of trawls through tax office websites around the world brings up a host of national initiatives. Examples drawn from just two jurisdictions – the UK and Australia – will illustrate the sorts of initiatives to counter avoidance that currently typify national responses[46]

In the UK, the 2006 Review of Links with Large Business (“The Varney Review”) shapes much of the current thinking about compliance, and therefore about anti- avoidance strategies. The focus of the Varney Review is upon outcomes designed to improve the attractiveness of the UK business tax administrative environment, and within this framework it has identified four key themes: certainty; risk management; speedy resolution of issues; and clarity through effective consultation. These themes have prompted a call for new kinds of relationships to be forged between HMRC and the business community where the watchwords are “disclosure, transparency, co- operation and proportionality.”[47]

Within this context, the development, maintenance and delivery of HMRC anti- avoidance policies and strategies is the direct responsibility of the Anti-Avoidance Group (“AAG”). The AAG has an important role in delivering the aims of HMRC and its broader compliance strategy. The AAG’s published strategies include[48] making tax law robust against avoidance; engaging with its customers about its approach to avoidance; optimising its operational response to avoidance; and changing the economics of avoidance to make it less attractive.

More specifically, the AAG identifies a series of actions designed to achieve these outcomes. These are:

This robust and proactive approach to avoidance activity is based upon real time-time intelligence (often made available through the scheme disclosure rules discussed later in the paper), together with the sensible application of the principles of risk management and proportionality. It fits comfortably within the broader cooperative compliance framework espoused in the Varney Review and HMRC publications.

Similar trends are visible in Australia. The ATO publishes a comprehensive annual compliance program[49] which describes the tax compliance risks it is most concerned about and what it is doing to address them. “Aggressive tax planning”, which the ATO defines as “the use of transactions or arrangements that have little or no economic substance and are created predominantly to obtain a tax benefit that is not intended by the law”, features as a prominent part of that annual program. The program identifies the ATO’s general approach to aggressive tax planning, certain headline issues, and its current focus and priorities, as well as actions taken and successes achieved in the preceding year.

The approach of the ATO to large business was spelled out in a 2007 speech by the Commissioner[50]. In that speech the Commissioner notes that “the challenge for large business and the Tax Office is to create certainty through transparency and cooperation”, and emphasises the current ATO mantra of “consultation, collaboration and co-design”. Mention is also made of two “Forward Compliance Arrangements” made with the ANZ bank and BP in the areas of GST and Excise, designed to promote governance arrangements that reduce the company’s risk of audits, tax litigation, penalties and interest, and also streamline access to support and advice.

Further developments in the direction of such compliance arrangements took place in May 2008, when the Commissioner of Taxation announced that the top 50 companies by turnover in Australia will be given the option of entering into an Annual Compliance Arrangement (“ACA”) with the Tax Office on a voluntary basis.[51] The intention of ACAs is to provide these companies with certainty in relation to their tax position. Under an ACA the ATO would issue the taxpayer with a sign-off letter confirming the outcomes of a joint risk assessment (including the development of a risk management plan). To the extent of the disclosure, the ATO would agree not to audit low risk matters, and for higher risk issues the company would know what those issues are.

The ACAs are built around the company that enters into the arrangement with the ATO having sound tax risk management processes, and making full and true disclosure. There is an expectation of sound corporate governance, early dialogue and mitigation of tax risks.

In summary, the UK and Australian responses to aggressive tax planning have moved beyond the “command and control” frameworks that typified the 1970s and 1980s to one of “responsive regulation” and “meta risk management” from the 1990s onwards.[52] Braithwaite explains that under the command and control approach “[t]axpayers lodged their returns, the [revenue authority] assessed them and decided how much tax was due. Audits were conducted to detect the provision of false information on returns, which, when detected, typically resulted in the imposition of modest penalties”.[53] That command and control mentality involved the seesaw of ‘carrot and stick’ approaches, oscillating between a customer service focus and one which relied on punitive legal action, depending on whichever particular philosophy happened to be in the ascendant at a particular time within the organisation.

Responsive regulation involves an enforcement pyramid (now encapsulated in Australia in the ATO’s Compliance Model) in which the bulk of taxpayers engaged in cooperative compliance are situated at the base of the pyramid, while a small hard- core of recalcitrant offenders are at the apex. Little enforcement activity is required for those at the base of the pyramid; essentially they require only the positive encouragement to comply. On the other hand the revenue authority possesses a credible capacity to escalate up the pyramid to progressively more severe sanctions in the face of persistently aggressive non-compliance. In Braithwaite’s terms, responsive regulation involves “sending clear signals through concrete enforcement actions that the agency is willing to escalate in order to create a culture where systemic preventive solutions and good relationships with taxpayers will do most of the compliance work”.[54] As part of this responsive regulation, meta risk management simply refers to the “risk management of risk management”.[55] It entails, as in the UK and Australia, revenue authority monitoring of the tax community’s self monitoring and self regulation.

International initiatives

Initiatives undertaken by national revenue authorities such as those outlined above for the UK and Australia have been supplemented by many international activities involving cooperation between tax authorities and work by multinational organisations. Work done on the elimination of tax havens and harmful tax competition by the OECD[56] would be just one example of the sorts of initiatives that have been taken in this area.

More recently the Forum for Tax Administration – established by the OECD in 2002 and attended by national Taxation Commissioners since 2004 with a mandate to develop effective responses to current administrative issues in a collaborative way by working with member and certain non-member countries – has considered the challenges faced with non-compliance with tax laws in an international context. In September 2006, 35 Commissioners or Deputy Commissioners signed the Seoul Declaration which stated that:

“Each country differs in the level and structure of its taxes, but all countries – both low and high tax countries, developed and developing – agree that once national tax laws have been enacted, they need to be enforced. Enforcement of our respective tax laws has become more difficult as trade and capital liberalisation and advances in communications technologies have opened the global marketplace to a wider spectrum of taxpayers. While this more open economic environment is good for business and global growth, it can lead to structures which challenge tax rules, and schemes and arrangements by both domestic and foreign taxpayers to facilitate non-compliance with our national tax laws. It is our duty as heads of our respective countries’ revenue bodies to ensure compliance with our national tax laws by all taxpayers, including activities beyond our borders, through effective enforcement and by taking preventive measures that deter non-compliance.”[57]

The Seoul Declaration set up an OECD study to examine the role of tax intermediaries (advisers) in relation to non-compliance and the promotion of unacceptable tax minimisation arrangements. The final report[58] emanating from the study concluded that some tax advisers do play a critical role in designing and promoting aggressive tax planning, but that it was overly simplistic to focus just on the supply side. Taxpayers themselves represent the demand side for aggressive tax planning, setting their own strategies for tax-risk management and determining their own appetites for tax risk. The report therefore considered the tripartite relationship between revenue bodies, taxpayers and tax advisers, and concluded that appropriate risk management tools were vital for revenue bodies. It further considered that revenue bodies needed to operate using the five following attributes in their dealings with all taxpayers:

  • understanding based on commercial awareness;
  • impartiality;
  • proportionality;
  • openness (disclosure and transparency); and
  • responsiveness.

The report noted that if “revenue bodies demonstrate these five attributes and have effective risk-management processes in place, this should encourage large corporate taxpayers to engage in a relationship with revenue bodies based on co-operation and trust”, described in the report as an “enhanced relationship”[59]. Such an enhanced relationship would benefit both the revenue authority and the taxpayer (through greater certainty and lower compliance costs). The report also accepted, however, that not all taxpayers would wish to adopt such enhanced relationships and that the demand for aggressive tax planning will not disappear completely. Thus “revenue bodies will need to have effective risk-management processes in place to identify these taxpayers and allocate the necessary level of resources to deal with them”.[60]

A further example of international cooperation between national tax authorities, this time outside the OECD, is the work of the Joint International Tax Shelter Information Centre (“JITSIC”) in countering international cross-border tax arbitrage activities on a real time basis.

JITSIC was established in May 2004 between the tax authorities of Australia, Canada, the UK and the US, with the objective of supplementing “the ongoing work of tax administrations in identifying and curbing abusive tax avoidance transactions, arrangements, and schemes.”[61] An early Press Release noted that an initial focus would include “the ways in which financial products are used in abusive tax transactions by corporations and individuals to reduce their tax liabilities, and the identifications of promoters developing and marketing those products and arrangements”. [62]

The purpose of this international task force is to:

  • provide support to the parties through the identification and understanding of abusive tax schemes and those who promote them;
  • share expertise, best practice and experience in tax administration to combat abusive tax schemes;
  • exchange information on abusive tax schemes, in general, and on specific schemes, their promoters and investors, consistent with the provisions of bilateral tax conventions; and
  • enable the parties to address better the abusive tax schemes promoted by firms and individuals who operate without regard to national borders.[63]

Boyle[64] has suggested that there are initial indications that JITSIC’s efforts are working and cites Mark Everson, then the head of the IRS, as saying: “We have seen things we either would never have picked up or would have picked up years down the road …. We have seen a series of kinds of transactions, or in some cases particular transactions, that merit follow-up by the individual taxing authorities.” Boyle also notes, however, that the actual output and practical impact of the organisation is difficult to ascertain as a result of the secrecy that surrounds much of JITSIC’s operations.

These specific examples of international collaboration between some of the revenue authorities – and there are plenty of other examples of both broader and narrower cooperation[65] – illustrate that governmental responses to tax avoidance activity- just like the avoidance activities themselves – go well beyond national borders. Revenue authorities have shown themselves to be more than willing to adopt a proactive and cooperative administrative stance to complement national activities and activities in the legislative and judicial spheres. The paper now considers some of those legislative and judicial initiatives.

4 Legislative responses to avoidance activity

Common law jurisdictions have not been reluctant to adopt direct legislative responses to the threats posed by avoidance activity, and the pace of the introduction of such measures has quickened in direct response to the perceived growth in the threat. Legislative responses have been on a number of broad fronts:

  • the introduction in all jurisdictions of specific or targeted anti-avoidance rules (“SAARs” and “TAARs”) aimed at particular areas where abuse has been identified or where revenue leakage is suspected, together with the continuing refinement and use of general anti-avoidance rules (“GAARs”) and legal principles in a number of the jurisdictions
  • the use of product or scheme disclosure rules to obtain real-time intelligence on avoidance market developments and the use of promoter penalty rules as a further weapon in the arsenals available to revenue authorities; and
  • the use of principles based drafting to combat avoidance activities.

These three broad areas are dealt with in turn, by reference to some major recent developments in some of the common law jurisdictions.

Anti-avoidance legislation

Specific legislation targeting tax avoidance

The intellectual dexterity of advisers and the complexity of commercial transactions have, over recent years, caused a mushrooming of schemes and arrangements that have attracted revenue authority attention and later the introduction of specific anti- avoidance rules to control their effectiveness. The use of specific integrity measures – as opposed to the use of general anti-avoidance rules which are dealt with later – has the advantage of precision. They are the “smart bombs” in contrast to the “carpet bombs” or “weapons of mass destruction”[66] that may be represented by general anti- avoidance provisions.

But they also carry the concern that their aim can be poor or that their impact can be deflected. Sometimes conceived in haste and rushed through national parliaments without due concern for the careful legislative drafting that must accompany any new tax measure, scheme promoters and tax advisers are often able to dodge their impact and even to incorporate them into fresh iterations of avoidance activity – the anti- avoidance karate identified by Lord Walker which was mentioned earlier. The Australian experience with the introduction of specific anti-avoidance measures designed to clamp-down on the alienation of personal services income through the use of interposed entities, introduced to operate with effect from 1 July 2000, is a classic example.[67] The initial legislation was well-intentioned but poorly conceived, and it is only after a number of refinements and amendments have passed through Parliament over the ensuing years that the measures have begun to operate as intended.

The UK has been among the more prolific of the common law jurisdictions in introducing new specific anti-avoidance measures in recent years. For example, the 2005 Budget saw the introduction of three new and extensive sets of specific anti- avoidance rules targeting, respectively, arbitrage, double tax relief avoidance and financial avoidance, as well as even more specific provisions to address abusive film schemes.

Two principal factors likely account for the UK’s greater reliance on specific anti- avoidance measures. In the first place, the UK – in contrast to Hong Kong, Australia, New Zealand, Canada and South Africa – does not have a statutory general anti- avoidance provision. While the existence of such a provision will never obviate the need for specific anti-avoidance legislation, and many of those countries who do have such a general rule still manage to generate plenty of specific provisions of their own, those countries with a general anti-avoidance rule do appear to be able to get away with less legislative enactment in this area.[68]

The second reason for the spate of specific anti-avoidance measures in the UK lies in its recent adoption – which is dealt with later – of a disclosure regime whereby promoters and users of potentially abusive tax avoidance schemes are required to disclose details of those schemes when they are first available for implementation. This boost to real time intelligence has led directly to the introduction of specific legislative measures to counter the identified abuse.

General anti-avoidance provisions

The second legislative response to tax avoidance activity is the continuing refinement and use of GAARs in a number of the jurisdictions. The 1998 Consultative Document on the possible introduction of a general anti-avoidance rule for direct taxes in the UK noted then[69]that “[t]he United Kingdom is unusual among developed countries in having neither a statute nor an established legal principle to counter tax avoidance in general. Many other countries in the developed world have found such a rule or principle to be a very useful remedy for countering tax avoidance, although not a universal cure”.

General anti-avoidance rules have operated for many years in most other common law jurisdictions, including Hong Kong (sections 61 and 61A of the Inland Revenue Ordinance), Canada, (section 245 of the Canadian Income Tax Act), New Zealand (sections BG1 and GB1 of the New Zealand Income Tax Act 1994), South Africa (sections 80A to 80L of the Income Tax Act 1962) and Australia. Australian governments use a variety of general anti-avoidance rules to combat what are perceived to be abusive avoidance activities. These include Pt IVA of the Income Tax Assessment Act 1936, section 67 of the Fringe Benefits Tax Assessment Act 1986 and Div 165 of the A New Tax System (Goods and Services Tax) Act 1999.

It is difficult to assess the effectiveness of the general anti-avoidance rules in each of the countries where they have operated. Much, obviously, depends upon the perspective adopted. In South Africa, for example, the South African Revenue Service held such grave concerns about the effectiveness of its previous GAAR that a completely fresh approach was adopted with a new provision enacted in late 2006.[70]

Brian Arnold, writing about recent court decisions in Canada[71] notes that these decisions “will inexorably render the rule largely ineffective…”, though Revenue Canada has enjoyed some success in the courts subsequently, particularly in the Mathew case.[72] In New Zealand the general anti-avoidance rules have operated with mixed success. Its own High Court recently held in Accent Management Ltd[73] that a forestry investment scheme involving a host of the hall marks that have been suggested are likely to constitute tax avoidance was in fact tax avoidance. In contrast, the Privy Council somewhat uncertainly held – in the Peterson[74] case – that a film scheme which had many of those same hall marks was not avoidance within the terms of the New Zealand general anti-avoidance rule.

The application of the general anti-avoidance provisions has also been anything but certain in Australia. The Commissioner of Taxation has enjoyed considerable success in using the rule to counter aggressive tax planning in the form of mass marketed schemes.[75] However, the four cases on Part IVA that have been litigated in Australia’s High Court thus far – Peabody, Spotless, Consolidated Press Holdings and Hart[76]– have produced mixed results for the Commissioner and have not always provided practitioners with the clear guidance that they often crave as to how the provisions will apply in the particular circumstances in which they are required to advise their clients.

An analysis conducted by the UK’s HMRC in 2006 of the general anti-avoidance provisions in a number of countries came to three broad conclusions. Firstly, that the tax landscape of each country was a product of many and diverse factors, including that country’s own history, culture and economic development. As a result, successful strategies in one country could not automatically be transported to another. Secondly, the approach of the judiciary to tax cases in general and avoidance in particular was vital to the effectiveness of anti-avoidance measures. And thirdly, that the impact of a particular anti-avoidance measure was heavily dependent upon the interaction of all the components of a compliance regime. For example, even the strongest GAARs were likely to be ineffective where avoidance schemes were unlikely to be detected in either the marketing phase or at the point at which returns were submitted; and they would also be ineffective if the revenue authority was unwilling to litigate avoidance cases.[77]

There is, therefore, no obvious conclusion as to whether the arsenal of anti-avoidance weaponry is better served with or without a general anti-avoidance measure. The US

– where judges have applied a robust, practical and commercial approach to tax avoidance cases – appears not to need such a rule. In the UK the jury is out. In most of those countries that do have a general anti-avoidance rule the provisions usually appear to operate successfully, but only – as in all provisions of last resort – where they are used sparingly. Over-use by revenue authorities is an abuse and can only serve to depreciate the value of the provision.

Product disclosure rules and promoter penalty regimes

The second area where there have been significant recent developments on the legislative front is the enactment, in many of the common law jurisdictions, of product/scheme disclosure legislation and promoter penalty regimes. Both types of legislative provision are designed to counter, essentially, the mass marketing of what might be loosely called tax exploitation schemes (to borrow the Australian terminology), although both are equally capable of dealing with boutique or one-off avoidance activity. Product disclosure schemes represent a pre-emptive strike, in that they have the capacity to provide revenue authorities with real time intelligence that can allow governments to move rapidly to close down loopholes and block avoidance. Promoter penalty regimes are more reactive and punitive, but can nonetheless act as a significant deterrent to those who might seek to market abusive tax schemes.

In 2004 the UK followed the lead of the US[78] and Canada by enacting legislation[79] designed to provide the tax authority with early information about “tax arrangements” and how they work, together with information about who has used them.[80] Tax arrangements were carefully defined to include any arrangement (for example, a scheme, transaction or series of transactions) that will, or might be expected to, provide the user with a tax advantage when compared to adopting a different course of action.

When the disclosure regime was introduced in the UK in 2004, disclosure was limited in scope to tax arrangements concerning employment (for example share schemes) or certain financial products. This was significantly widened with effect from August 2006 to the whole of income tax, corporation tax and capital gains tax. There are also disclosure rules relating to Stamp Duty Land Tax, VAT, and – since May 2007 – National Insurance Contributions.

The introduction of these disclosure requirements in the UK initially caused widespread concern within the tax profession. That concern seems, to some extent, to have been dissipated by the introduction of “hallmarking”, which was designed to limit the need to disclose all tax efficient schemes – the intention of the hallmarks (for example, tests such as confidentiality, premium fees, the presence of off-market terms) being to limit disclosure to only those schemes that are new, innovative, or of specific concern. Certainly a House of Lords Select Committee was pleased to note in 2006 the consensus among private sector witnesses that the rules were working well.[81] Those rules have certainly provided HMRC with unparalleled access to real- time intelligence that has enabled it to move swiftly to legislate against avoidance activity deemed to be a threat to the revenue base.

Table One: UK Disclosures Statistics


Financial Year

Direct Tax


VAT Disclosures

Total Disclosures

1 Aug 04 – 31 Mar 05




1 Apr 05 – 1 Apr 06




1 Apr 06 – 1 Apr 07




1 Apr 07 – 1 Apr 08




Source: accessed 18 May 2008

Table One shows scheme disclosures in the first four years of operation of the rules. Note that the statistics do not show the numbers of users of the schemes, as details of clients and users are not required under the rules. Nor do the statistics show the number of generic schemes disclosed, as more than one person may disclose the same type of scheme.

Australia (and likewise Hong Kong, New Zealand and South Africa) has not yet implemented a disclosure regime of this nature, though it is a matter of some speculation as to whether it is merely a question of time before the revenue authorities in those countries manage to persuade their political masters of the absolute necessity for such wide-reaching provisions. But, to date and in Australia at least, the recent emphasis has been upon the enactment of legislation designed to impose penalties upon the promoters of what have been labelled “tax exploitation schemes”.

Legislation[82]designed to deter the promotion of tax exploitation schemes in Australia was introduced in early 2006. The legislative provisions seek to deter: the promotion of tax avoidance and evasion schemes (collectively referred to in the legislation as tax exploitation schemes); and the implementation of schemes that have been promoted on the basis of conformity with a product ruling, in a way that is materially different to that described in the product ruling.

In summary[83]the provisions enable the Commissioner to:

  • request the Federal Court of Australia to impose a civil penalty on a scheme promoter or implementer. The maximum penalty the Federal Court can impose is the greater of 5,000 penalty units (currently equal to AUD$550,000) for an individual or 25,000 penalty units (currently equal to AUD$2.75 million) for a body corporate and twice the consideration received or receivable, directly or indirectly, by the entity or its associates in respect of the scheme;
  • seek an injunction to stop the promotion of a scheme or implementation of a scheme not in conformity to its product ruling; and
  • enter into voluntary undertakings with promoters or implementers about the way in which schemes are being promoted or implemented.

In deciding what penalty is appropriate, the Federal Court can have regard to all matters it considers relevant, including the amount of loss or damage incurred by scheme participants and the honesty and deliberateness of the promoter’s conduct.

The Explanatory Memorandum notes[84]that the civil penalty regime is not intended to inhibit the provision of independent and objective tax advice, including advice regarding tax planning. Some commentators have, however, expressed serious reservations about the potential impact on tax advisers providing tax planning advice, as well as expressing concerns about many other aspects of the promoter penalty provisions.[85]

Principles based drafting

Sir Ivor Richardson long ago suggested that traditional legislative drafting techniques

– “where certainty and precision are sought through the detailed expression of policies in the variety of complex circumstances in which they will operate” and “too often the intent is lost or blurred in a legislative fog”[86] – may be inappropriate for tax law. There have been serious attempts in various jurisdictions since then to adopt a more principles-based approach to legislative drafting. In the UK in recent years this has been extended to an attempt to draft principles-based legislation to tackle avoidance activity. This was part of the simplification package announced by the UK Government in the Pre Budget Report in 2007.[87]

Late in 2007 HM Treasury and HMRC jointly released a consultation document[88] which seeks to use principles-based legislation to tackle avoidance arising from or through disguised interest[89] and sales of income streams arrangements.[90 ] Principles based legislation strives to embody a principle of UK taxation, and it is proposed that the principle would be accompanied by a statement of how the legislation intends to operate by reference to that principle. Thus, for example, the principle dealing with disguised interest simply states: “A return designed to be economically equivalent to interest is to be taxed in the same way as interest”.

It is argued that the introduction of such legislation will allow the repeal of significant amounts of existing legislation. Other claimed benefits include the potential for greater certainty, enhanced conceptual simplicity, improved coherence, reduced complexity and compliance costs, and the promotion of fairness and consistency. Against this, the consultation document considers that the disadvantages might be that a principles-based approach might cast a net so broad that unintended transactions might be caught up in it, and that it might be an inadequate or ineffective replacement of existing anti-avoidance provisions.

The process of consultation is still on-going, and responses have been mixed. Changes were made to the initial draft legislation relating to disguised interest as a result of a workshop convened in January 2008, but the Government did not proceed, as intended, to introduce principles-based avoidance legislation in the 2008 Finance Bill. It is therefore a little early to assess the likely outcomes of this initiative, but it is clear that this more generic approach to anti-avoidance legislation has strong support in the UK within Government agencies. Other countries are watching with interest.

5 The role of the courts in countering avoidance

If the legislatures of the various common law jurisdictions have been active in recent years in seeking to counter tax avoidance activity, their productivity has been more than matched by the judiciaries in those regimes. Cases relating to tax avoidance and tax planning have typically constituted one of the major areas of tax litigation in many of these regimes.

This is not to suggest that the respective judiciaries have necessarily been pro-revenue in their deliberations. Indeed, many of the major cases that have recently been heard have provided disappointing outcomes to revenue authorities. Nor is it to suggest that the deliberations of the courts have necessarily provided any greater clarity on the dividing line between what might be regarded as acceptable tax mitigation or unacceptable tax avoidance. The line remains as unclear as ever.

But an examination of recent cases, particularly those heard in the superior courts in common law jurisdictions, does reveal some significant developments in the jurisprudence in this area, and in particular shows that there is now a greater certainty in the approaches that those courts are likely to take in the interpretation of the statutory provisions that exist in their respective jurisdictions. Such an examination also leads to the tentative conclusion that there is some level of convergence in the interpretative approaches in many of the common law jurisdictions, although by no means a consensus in how such cases should be approached. Moreover, that degree of convergence that has occurred has come about from very different starting positions and through very different routes.

There has been an emphasis in recent UK superior court judgments in cases such as

Arctic Systems,[91] West v Trennery,[92] Barclays Mercantile,[93] Scottish Provident,[94] McGuckian,[95] and MacNiven[96 ] that the role of the judges is to interpret the words of the statute, and to do so in a purposive fashion. As Tiley notes after considering some of those cases, “we are left with the simple fact that tax law is about interpreting statutes and that statutes should be interpreted purposively…and in their context”.[97]

This represents a clear departure from the view that had developed in the UK and elsewhere in the line of cases starting with Ramsay[98]and developing through Furniss Dawson.[99] Those earlier cases had suggested that there was an extra-statutory anti- avoidance rule of law, or doctrine – the so-called “Ramsay doctrine” – which was to be applied by the courts when considering avoidance issues. Effectively that doctrine asserted that where there was a preordained transaction or series of transactions which had steps inserted for no commercial purpose, those steps could be ignored and the relevant statutory provisions could be applied to the end result. Andrew Halkyard reminds us of some of the epithets applied to the Ramsay doctrine:[100]“the doctrine of disregard”; the principle of fiscal nullity”; “a judge-made anti-avoidance weapon” “a weapon of mass destruction” and “a broad spectrum antibiotic which kills off all anti- avoidance schemes”.

Lord Hoffmann, writing on tax avoidance after being involved in the Barclays Mercantile case, states:

“The primacy of the construction of the particular taxing provision and the illegitimacy of rules of general application has been reaffirmed by….[Barclays Mercantile]. Indeed, it may be said that this case has killed off the Ramsay doctrine as a special theory of revenue law and subsumed it within the general theory of the interpretation of statutes….”[101]

This does not imply any reversion to a literal approach to statutory interpretation, which was part of the rationale for the emergence of the Ramsay doctrine in the first place. Instead a textual, contextual and purposive approach is likely to underpin judicial reasoning in the UK’s consideration of avoidance cases in the future. As Freedman notes: “The House of Lords has now confirmed that the essence of the “new approach” to tax avoidance in the United Kingdom is that the court gives tax provisions a purposive construction in order to determine the nature of the transaction to which it is intended to apply, before going on to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answers that statutory description”.[102]

This is not to suggest that the current UK position is stable, or that it provides the certainty of outcome that advisers crave. But, it has removed some of the old chaos[103] and at least suggests that it is able to provide certainty of approach, if not of outcome.

The Ramsay doctrine held particular sway in the UK in part because the UK does not have the “provision of last resort” that is represented by a statutory general anti- avoidance rule. In that respect it is not dissimilar to the US where a host of judicial doctrines, including the business purpose test, the step transaction doctrine, the sham doctrine and the economic substance doctrine, have prevailed in cases relating to tax avoidance. But although the UK shares with the US the lack of a general anti- avoidance rule, it does not share – as Barclays Mercantile has made absolutely clear – any tradition in which judicial anti-avoidance doctrines make good statutory deficiencies.

There is, however, also evidence of a greater consistency in the interpretative approach to tax avoidance cases taken by the superior courts in countries which do have statutory general anti-avoidance rules. In comparing the outcomes of the two recent anti-avoidance cases to have been heard by the Canadian Supreme Court (Canada Trustco[104] and Mathew[105]) with the UK outcomes in Barclays Mercantile and Scottish Provident, Freedman notes the “similarities between the positions reached in the two countries via different routes. In each country the intention of the particular statute concerned, as revealed by its wording construed in context, is paramount; in each jurisdiction the fact that a transaction is motivated by tax saving is not, on its own, fatal to its effectiveness for tax minimization purposes”.[106]

In cases such as these, both Canada and the UK have also affirmed that there is no place for a business purpose test – along the lines of the doctrine that has prevailed in the US since its seminal case of Helvering v Gregory[107]in the 1930s.

The emerging jurisprudence on Australia’s general anti-avoidance rule suggests that the courts, in Australia as well as the UK and Canada, must consider the words of the statute interpreted in a purposive fashion, as required by the provisions of the Acts Interpretation Act. The provisions of Part IVA are quite prescriptive, and if interpreted literally could annihilate virtually all tax planning transactions. Part IVA involves a consideration of three basic requirements. Firstly, there must be a “scheme”. This is so broadly defined as to encompass virtually any act or transaction, although the judgment by the Federal Court in the 2007 Star City case[108] has suggested that the existence of a scheme cannot always be taken for granted. The second is that there must be a “tax benefit”, again broadly defined. The final element, which is the area of greatest contention, is that the scheme must have been entered into for the sole or dominant purpose of obtaining a tax benefit. This requires an objective assessment, based upon analysis of eight factors, including the manner in which the scheme was implemented, its form and substance, and its effect.

There is some evidence of a tension between the lower and higher courts in Australia over the interpretation of Part IVA. The Federal and Full Federal Courts have shown themselves willing to adopt a more commercial approach to the interpretation of the provisions. This is not to suggest that a “business purpose” test has emerged in those courts, but they are certainly more likely to find in favour of the taxpayer where – on an objective examination of the circumstances surrounding the transaction – they are able to establish a commercial motive for the transaction. In its deliberations, in contrast, the High Court has repeatedly insisted that this is not the appropriate approach, and that the legislation must be construed purposively with a view to establishing the appropriate outcome. Upon occasions this approach has favoured the revenue (Spotless, Hart) and upon others the taxpayers have succeeded (Peabody).

Recent judicial decisions in Hong Kong and New Zealand also confirm the purposive approach to the interpretation of taxation statute in common law jurisdictions. For example, the Arrowtown[109]case in Hong Kong reasserted “the need to apply orthodox methods of purposive interpretation to the facts viewed realistically”.[110]

The facts in the Peterson[111]case in New Zealand, heard by the Privy Council in 2005, bear some resemblance to those in Barclays Mercantile and Canada Trustco, save that the object of investment was films rather than pipelines or trailers. The outcome was also similar, in that the taxpayer was successful in claiming depreciation allowances (the claim was for capital allowances in Barclays Mercantile and capital cost allowance deductions in Canada Trustco). This tends to confirm the view that there is some degree of convergence in the jurisprudence in some of the common law jurisdictions in the approach taken by the courts to avoidance type cases, albeit through the interpretation of very different legislation. The Canadian and New Zealand general anti-avoidance rules have some similarities, but are – in substance – quite different from each other. And both are very different from the specific legislative provisions that were in play in Barclays Mercantile.

The Peterson case also illustrates very clearly the absolute difficulty of determining, with any degree of certainty, where the borderline lies between what Lord Millett (who delivered the majority decision in favour of the taxpayer) deemed an “acceptable tax advantage” (for which read tax mitigation) as opposed to an “unacceptable tax advantage” (for which read tax avoidance).[112] The Privy Council split three to two in favour of the taxpayer, and it is interesting to note that both the majority judgment (Lord Millett, Baroness Hale and Lord Brown) and the minority judgment (Lord Bingham and Lord Scott) made reference to the fact that this was not a borderline case. The majority regarded it as clear that the general anti-avoidance rule was not applicable; by the same token the minority noted, in their judgment, that “a clearer case [for the application of the New Zealand general anti-avoidance rule] can hardly be imagined”.[113]

Drawing the threads together, it can be concluded that the courts – and particularly the superior courts – in all of the common law jurisdictions examined have reached the position of accepting that taxing statutes, just like other law, are to be consistently interpreted in a purposive fashion, having regard not only to the words of the legislation but also to the intended legislative effect. This convergence exists notwithstanding different starting points and different routes.

Above all else though, the inevitable conclusion is reached that despite the large number of cases that have been heard in recent years and despite a greater certainty of interpretive approach by the courts, there is still no certainty of outcome from the courts. The dividing line between acceptable tax mitigation and unacceptable tax avoidance remains as indistinct as ever. As has been noted by Michael Littlewood in writing about decisions of the Privy Council in this area, the line is one of the most difficult in the whole of the law. “All in all, to describe the distinction between avoidance and mitigation as “vague” is to understate the problem, for it suggests that there is general agreement as to roughly where the line lies and that the disagreement is only as to marginal cases. But none of their Lordships appear to have regarded any of the cases as marginal. It is difficult, therefore, to extract from them any guidance as to where the line lies”.[114]

Perhaps it has to be concluded that the courts will never be in a position to provide certainty of outcome, but that consistency of approach is at least a step in the right direction.

6 Conclusions

It may be too cynical to assume “the existence of tax avoidance as a constant and perpetual motivation for every taxpayer”[115], but there is no doubt that tax avoidance is widespread and that it presents a major problem for those concerned with public finance issues. There is some evidence that the aggressive retail marketing of tax avoidance products and schemes may have been constrained in recent years, but avoidance activity is by its nature opportunistic and ad hoc. Simply raising the price of avoidance (through successful containment, increased regulation and constrained supply) will not choke off demand.

Indeed, no single response or approach – whether administrative, legislative or judicial – can adequately or effectively contain avoidance activity. Such containment only begins to occur where strategies drawn from all three spheres complement each other by operating in combination. As Sir Ivor Richardson astutely pointed out some years ago, current requirements for a comprehensive and integrated approach go beyond a more traditional analysis where “the legislature … exerts control of tax avoidance through special and general anti-avoidance provisions; the revenue administration contributes in administering those provisions and exercising discretions; and the judiciary is expected to strike the right balance between acceptable and unacceptable tax planning through its interpretation and application of tax legislation.”[116]

Ultimately, however, corporate and personal taxpayers themselves have to take responsibility for the level of avoidance and the degree of acceptance of such behaviour that exists at any time in any society. The revenue authority, the legislature and the judiciary can play a role in shaping the demand for, and supply of, tax avoidance activity, but such issues belong, in the final analysis, in the realms of moral and ethical behaviour of the taxpayers themselves. Corporate and personal social responsibility – and the reputational damage that excessive and egregious avoidance activity can attract – remains the ultimate deterrent, notwithstanding the impressive arsenal that can be available to those who seek to counter avoidance.

Beyond that we should also perhaps be mindful that two of the traditional goals of public finance – simplicity and equity – have critical roles to play in determining social responses to avoidance activity. In recent years these two goals may have been less prominent in tax reform than the efficiency goal that lends itself to easier economic measurement and evaluation.

It is paradoxical that the more complex that the tax regime becomes (often in attempts to contain avoidance activity), the more likely it will be that opportunities for avoidance will arise. Avoidance activity thrives in complexity and uncertainty. And where that complexity exacerbates the natural interaction (sometimes mediated by intermediaries) between the taxpayer and the revenue authority such that it becomes frictional rather than cooperative, there will almost inevitably be a higher probability of avoidance activity.

Equity also carries with it the important message that tax systems must not only be fair – they must also be perceived to be fair. If vast swathes of the population are not convinced that the tax system does operate fairly (whether it does or not), or that sectional interests hold undue sway or receive inappropriate favours (whether they do or not), they are themselves more likely to engage in the sorts of nefarious activities that they condemn in others.

[1]The work in this paper draws upon, and updates, my work previously published in this area, including C. Evans, “Barriers to Avoidance: Recent Legislative and Judicial Developments in Common Law Jurisdictions”, Hong Kong Law Journal, (2007) Vol 37 No 1; C. Evans, “Nuclear deterrents, snipers, shotguns and more”, Editorial, Australian Tax Review, (2007) Vol 36(3); and C. Evans, “The Battle Continues: Recent Australian Experience with Statutory Avoidance and Disclosure Rules”, in Beyond Boundaries: Developing Approaches to Tax Avoidance and Tax Risk Management, (edited Freedman J), (2008) Oxford University Centre for Business Taxation, Oxford.

[2]A notable exception is the chapter by M. Brooks and J. Head, “Tax Avoidance: In Economics, Law and Public Choice”, in G. S. Cooper, Tax Avoidance and the Rule of Law (Amsterdam: IBFD, 1997).

[3 ]R. Musgrave and P. Musgrave, Public Finance in Theory and Practice (Singapore: McGraw-Hill,

1989 (Fifth Edition)).

[4] For example: N. Tutt, The Tax Raiders: The Rossminster Affair (London: Financial Training, 1985) and The History of Tax Avoidance (London: Wisedene, 1989); J. McBarnet and C. Whelan, Creative Accounting and the Cross-Eyed Javelin Thrower (Chichester: John Wiley, 1999); J. Freedman, “Defining Taxpayer Responsibility: In Support of a General Anti-Avoidance Principle”, (2004) 4 British Tax Review, 332−357); J. Slemrod, “An Empirical Test for Tax Evasion”, (1985) 67 Review of Economics and Statistics 232−238; J. Bankman, “The New Corporate Tax Shelters Market”, (1999) 83

Tax Notes, 1775; J. Braithwaite, Markets in Vice: Markets in Virtue, (Leichardt: Federation Press, 2005).

[5] SARS, Discussion Paper on Tax Avoidance, (Law Administration, South African Revenue Service, November 2005) at pp 3, 16, 19.

[6]V. Tanzi, Globalization Technological Developments and the Work of Fiscal Termites, (Washington

DC: International MonetaryFundWP/00/181,2000).

[7]J. Braithwaite, Marketsin Vice: Markets inVirtue,(Leichardt: Federation Press, 2005).

[8]For example, in August 2005 US Government prosecutors secured a US$456 million settlement with KPMG LLP as part of a deferred prosecution agreement in which KPMG admitted to fraudulent conduct in the design and marketing of a series of tax shelters including Flip, Opis, Blips and SOS. See also D. Weisbach, “Comments on Recent Developments on Tax Shelters in the US”, paper presented at Corporation Tax: Breaking Down The Boundaries, Oxford University Centre for Business Taxation, Oxford, 28 and 29 June 2007, in which the author suggests that in the US in 2007 there is “a consensus that the large scale retail marketing of tax shelters has slowed significantly.”

[9 ]See, for example, ATO, Aggressive Tax Planning End-To-End Process, (ATO Practice Statement LawAdministration PS LA 2005/25, December 2005).

[10]See, for example, SARS, Discussion Paper on Tax Avoidance, (Law Administration, South African RevenueService, November2005).

[11]See, for example, Lord Templeman’s judgment in the case of CIR (NZ) v Challenge Corporation Ltd, [1987] AC 155, and Lord Goff’s judgment in Ensign Tankers (Leasing Ltd) v Stokes [1992] 1 AC 655.

[12]R. Woellner, S. Barkoczy, S. Murphy, and C. Evans, Australian Taxation Law, (Sydney: CCH 18th edn,2008), atpp 1484−1488.

[13]Accessedat, 23 October2006.

[14] International Tax Terms for the Participants in the OECD Programme of Cooperation with Non- OECD Economies (Paris: OECD).

[15]See, for example, SARS, Discussion Paper on Tax Avoidance, (Law Administration, South African RevenueService, November2005).

[16]International Tax Terms for the Participants in the OECD Programme of Cooperation with Non- OECD Economies (Paris: OECD).

[17]CIR v Willoughby [1997] 4 All ER 65,atp 73.

[18]SARS, Discussion Paper on Tax Avoidance, (Law Administration, South African Revenue Service, November 2005).

[19]McNiven v Westmoreland [2001] STC 257.

[20]Walker, Lord, Ramsay 25 Years On: Some Reflections on Tax Avoidance, (2004) LQR 412, at 416.

[21]SARS, Discussion Paper on Tax Avoidance, (Law Administration, South African Revenue Service, November 2005), at p 16.

[22] In the Australian Spotless case (FCT v Spotless Services Ltd (1996) 186 CLR 404) nirvana was sought by the taxpayer but on this occasion not attained.

[23] The Australian Citylink case (Commissioner of Taxation (Cth) v Citylink Melbourne Ltd (2006) 80 ALJR1282;62 ATR648;[2006] HCA35)more thanadequately illustrates the advantagesof deferral.

[24] The 1997 McGuckian case in the UK (IRC v McGuckian [1997] 1 WLR 991) is a straightforward example of re-characterisation. That case involved a transfer of shares to a non-resident trust, together with the subsequent sale of the rights to dividends from the shares for a lump sum which, it was unsuccessfully contended, was capital innature.

[25]As in the UK Barclays Mercantile case (Barclays Mercantile Business Finance Ltd v Mawson [2005] STC 1; [2004] UKHL 51).

[26]As in the Australian Peabody case (FC of T v Peabody (1994) 181 CLR 359; 94 ATC 4663).

[27]J. Waincymer, “The Australian Tax Avoidance Experience and Responses: A Critical Review”, in G. S. Cooper, Tax Avoidance and the Rule of Law, (Amsterdam: IBFD, 1997), at p 248.

[28]Walker, Lord, Ramsay 25 Years On: SomeReflectionsonTaxAvoidance,(2004) LQR412,at 416.

[29]WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300.

[30]CIR v Willoughby [1997] 4 All ER 65.

[31]Barclays Mercantile Business Finance Ltdv Mawson[2005] STC1; [2004]UKHL 51.

[32]SARS, Discussion Paper on Tax Avoidance, (Law Administration, South African Revenue Service, November 2005), at pp 19−27.

[33]SARS, Discussion Paper on Tax Avoidance, (Law Administration, South African Revenue Service, November 2005), at p 16.

[34]Accessed at 17 May 2008.

[35]J. Braithwaite, Marketsin Vice: Markets inVirtue,(Leichardt: Federation Press, 2005).

[36]G. Richards, “Finance Act Notes: Disclosure of Tax Avoidance – Section 19”, (2004) 5 British Tax Review,451−454,atpp 453−454.

[37]SARS, Discussion Paper on Tax Avoidance, (Law Administration, South African Revenue Service, November 2005), at pp 7, 8.

[38]W.Pederick,“Fairand Square Taxation forAustralia”,(1984) 19Taxationin Australia6, 575−581.

[39] US Treasury, The Problem of Corporate Tax Shelters – Discussion, Analysis and Legislative Proposals,(Washington DC:United States TreasuryDepartment,1999), at p 19.

[40] A derisive term originally coined to describe the property developers who worked with Sir Joh Bjelke-Petersen, Premier of Queensland, in a number of suspicious deals in the 1960s, 1970s and 1980s.

[41]SARS, Discussion Paper on Tax Avoidance, (Law Administration, South African Revenue Service, November 2005), at p 27.

[42]Her Majesty’s Revenue and Customs Anti-Avoidance Group “Our Vision and Strategy” accessed at 17 May 2008. Note that the Trade Unions Congress, in a 2008 Touchstone Report, suggested that tax avoidance in the UK was costing £25 billion in lost revenue. As noted by B. Dodwell, “Missing Billions? Where’s the Evidence?”, Tax Adviser, March 2008, this figure, representing some 5% of UK total tax yield, is unlikely.

[43] M. Boyle, “Cross-Border Tax Arbitrage – Policy Choices and Political Motivations”, (2005) 5 BritishTax Review,527−543,at p 531.

[44] J. Bankman, “An Academic’s View of the Tax Shelter Battle”, in H. Aaron and J. Slemrod (eds),

Crisis inTax Administration(Washington DC: BrookingsInstitution Press, 2004), at p 31.

[45]OECD, Harmful Tax Competition: An Emerging Global Issue, (Paris: OECD, 1998), at para 30.

[46]For an overview of recent US initiatives in countering avoidance activity, see D. Weisbach, “Comments on Recent Developments on Tax Shelters in the US”, paper presented at Corporation Tax: Breaking Down The Boundaries, Oxford University Centre for Business Taxation, Oxford, 28 and 29 June 2007.

[47]D. Hartnett, “Boundaries, Behaviour and Relationships: The Future”, paper presented at Corporation Tax: Breaking Down The Boundaries, Oxford University Centre for Business Taxation, Oxford, 28 and 29 June2007.

[48 ]Her Majesty’s Revenue and Customs Anti-Avoidance Group “Our Vision and Strategy” accessed at 17 May 2008.

[49 ]The latest is theComplianceProgram 2007−08,availableat

[50]M. D’Ascenzo, Creating the Right Environment: Transparency, Cooperation and Certainty in Tax, Financial Executives International of Australia Conference, Sydney, 19 June 2007 available at .

[51]M. D’Ascenzo, A New Dimension, Corporate Tax Association Convention, Sydney, 12 May 2008.

[52]J. Braithwaite, Marketsin Vice: Markets inVirtue,(Leichardt: Federation Press, 2005).

[53]J. Braithwaite, Markets in Vice: Markets in Virtue, (Leichardt: Federation Press, 2005), at p 68.

[54 ]J. Braithwaite, Marketsin Vice: Markets inVirtue,(Leichardt: Federation Press,2005),at p178.

[55]J. Braithwaite, Marketsin Vice: Markets inVirtue,(Leichardt: Federation Press,2005),at p85.

[56] See, for example, OECD, Harmful Tax Competition: An Emerging Global Issue, (Paris: OECD, 1998).

[57]D. Butler, “Tax Administration in an International Context – The Study into the Role of Tax Intermediaries”, Tax Administration: Safe Harbours and New Horizons, Eighth Atax International Tax Administration Conference, Sydney, March 2008.

[58]OECD,Studyintothe Role ofTax Intermediaries,(Paris: OECD,2008).

[59 ] OECD, Study into the Role of Tax Intermediaries, (Paris: OECD, 2008), at p 5.

[60]OECD,Studyintothe Role ofTax Intermediaries,(Paris:OECD,2008),atp6.

[61]Joint International Tax Shelter Information Centre Memorandum of Understanding, accessed at and 27 October 2006.

[62]Australia, Canada, UK and US Agree to Establish Joint Task Force, (IRS Newswire IR-2004-61, 3

May 2004).

[63]Joint International Tax Shelter Information Centre Memorandum of Understanding, accessed at and 27 October 2006.

[64 ]M. Boyle, “Cross-Border Tax Arbitrage – Policy Choices and Political Motivations”, (2005) 5 BritishTax Review,527−543,at pp 533−534.

[65] See M. Dirkis, “Looking Beyond Australia’s Horizon: The internationalisation of Australia’s Domestic Taxation Information Gathering and Debt Collection Powers”, Tax Administration: Safe Harbours and New Horizons, Eighth Atax International Tax Administration Conference, Sydney, March 2008.

[66]This analogy is provided by A. Halkyard in “Not a Weapon of Mass Destruction: Can the Ramsay Approach Apply to the Inland Revenue Ordinance in Hong Kong?”, (Autumn 2005) 9 Asia-Pacific Journal of Taxation 3, 56−72.

[67]The anti-avoidance rules are contained in Income Tax Assessment Act 1997, Pt 2-42.

[68] See also, D. Weisbach, “Formalism in the Tax Law”, 66 Chicago Law Review, 869 (1999) in this connection.

[69]Inland Revenue, A General Anti-Avoidance Rule for Direct Taxes: Consultative Document, (London: Inland Revenue, 1998), at para 4.3.

[70]E. Liptak, “Battling with Boundaries: The South African GAAR Experience”, paper presented at Corporation Tax: Breaking Down The Boundaries, Oxford University Centre for Business Taxation, Oxford, 28 and 29 June 2007.

[71]B. Arnold, “The Long, Slow Steady Demise of the General Anti-Avoidance Rule”, (2004) Canadian TaxJournal, at 488.

[72]Mathew v TheQueen2005 SCC 55.

[73]Accent ManagementLtd &Others v CIR (2005) 22NZTC19027.

[74]Peterson v CIR [2005] STC 448.

[75 ]See, for example, Howland-Rose and Others v FCT [2002] FCA 246; 2002 ATC 4200; Vincent v FCT 2002 ATC 4742; Puzey v FCT 2003 ATC 4782; FCT v Sleight [2004] FCAFC 94; 2004 ATC 4477. Incontrast, see FCT vCooke &Jamieson[2004] FCAFC75 and LenzovFCT2007 ATC 5016.

[76 ]FCT v Peabody (1994) 181 CLR 359; FCT v Spotless Services Ltd (1996) 186 CLR 404; FCT v Consolidated Press HoldingsLtd [2001] HCA 32; FCT vHart [2004]HCA 26.

[77 ]D. Pickup, “Comparative Study of the Legal Frameworks Used by Different Countries to Protect their Tax Revenues”, paper presented at Corporation Tax: Breaking Down The Boundaries, Oxford University Centre for Business Taxation, Oxford, 28 and 29 June 2007. The countries that were examined were the UK, Canada, South Africa, New Zealand, Australia, US, Netherlands and Spain.

[78]See D. Weisbach, “Comments on Recent Developments on Tax Shelters in the US”, paper presented at Corporation Tax: Breaking Down The Boundaries, Oxford University Centre for Business Taxation, Oxford, 28 and 29 June 2007 for a review of the significant recent changes to US disclosure rules, including changes to reportable transactions and the obligation for tax shelter promoters to provide lists of clients to the Internal Revenue Service.

[79 ]FinanceAct 2004, ss19andPart7(ss306−319).

[80] HM Revenue and Customs, Guidance: Disclosure of Tax Avoidance Schemes, (London: HMRC, June 2006), at p 11.

[81]Cited in J. Tiley, “The Avoidance Problem: Some UK Reflections”, paper presented at Corporation Tax: Breaking Down The Boundaries, Oxford University Centre for Business Taxation, Oxford, 28 and 29 June 2007.

[82]Division 290 of Tax Administration Act1953.

[83 ]Chapter 3 Explanatory Memorandum to Tax Laws Amendment (2006 Measures No. 1) Act 2006.

[84] Paragraph 3.50 Explanatory Memorandum to Tax Laws Amendment (2006 Measures No. 1) Act 2006.

[85] For example, J. King, “New Measures Deterring the Promotion of Tax Exploitation Schemes”, (2006) Australian Tax Review 35 (3).

[86] I. Richardson, “Reducing Tax Avoidance by Changing Structures, Process and Drafting” in G. S. Cooper, Tax Avoidance andtheRuleof Law, (Amsterdam: IBFD, 1997), at p 338.

[87]HM Treasury, Pre-Budget Report and SpendingReview, London,2007.

[88]HM Treasury and HMRC, Principles-based Approach to Financial Products Avoidance: A Consultation Document, London, December 2007.

[89]“Disguised interest schemes exploit differences in tax treatment between interest and other receipts such as dividends, and seek to convert taxable interest into an exempt dividend or capital gain. For example, a person subscribes for shares in a company that only has one asset, which increases in value in the same way as an investment with a guaranteed return. When the shares in the company are sold or redeemed, the return on them equates in substance to an amount from, say, a bank deposit.” HM Treasury and HMRC, Principles-based Approach to Financial Products Avoidance: A Consultation Document, London,December2007, atpara 2.1.

[90]“Selling an income stream is a device designed to try to turn economic income into a return that is treated by tax law as capital.” HM Treasury and HMRC, Principles-based Approach to Financial Products Avoidance: A Consultation Document, London, December 2007, at para 3.1.

[91]Jones v Garnett[2007] UKHL 35.

[92][2005] STC214.

[93]Barclays Mercantile Business Finance Ltdv Mawson [2005] STC1; [2004]UKHL 51.

[94 ]Scottish Provident Institution v Inland Revenue Commissioners [2004] UKHL 52; [2004] 1 WLR 3172(HL).

[95]IRC vMcGuckian[1997] 1 WLR991.

[96]MacNiven v WestmorelandInvestments[2001] STC237 (HL).

[97 ]J. Tiley, “Barclays and Scottish Provident: Avoidance and Highest Courts: Less Chaos but More Uncertainty”,(2005) 3 British Tax Review,273−280,at p 273.

[98]WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300.

[99]FurnissvDawson [1984] AC 474.

[100 ]A. Halkyard in “Not a Weapon of Mass Destruction: Can the Ramsay Approach Apply to the Inland

Revenue Ordinance in Hong Kong?”, (Autumn 2005) 9 Asia-Pacific Journal of Taxation 3, 56−72.

[101]L. Hoffmann, “Tax Avoidance”,(2005) 2BritishTax Review, pp 197−206,at 203.

[102]J. Freedman, “Converging Tracks? Recent Developments in Canadian and UK Approaches to Tax Avoidance”, (2005)53 Canadian TaxJournal 4, pp 1038-1046, at1040-1041.

[103] J. Tiley, “Barclays and Scottish Provident: Avoidance and Highest Courts: Less Chaos but More Uncertainty”,(2005) 3 British Tax Review,273−280atp 274.

[104]The Queenv Canada TrsutcoMortgage Co 2005 SCC 54.

[105]Mathew v TheQueen2005 SCC 55.

[106]J. Freedman, “Converging Tracks? Recent Developments in Canadian and UK Approaches to Tax Avoidance”, (2005) 53 Canadian Tax Journal 4, pp 1038-1046, at 1039.

[107]69F 2nd 809 (1934).

[108]Star City Pty Ltd v FCT [2007] FCA 1701.

[109]CollectorofStampRevenue vArrowtown Assets Ltd [2004] 1 HKLRD 77.

[110]A. Halkyard, “Not a Weapon of Mass Destruction: Can the Ramsay Approach Apply to the Inland

Revenue Ordinancein HongKong?”, (Autumn2005) 9Asia-Pacific Journalof Taxation3, 56−72.

[111]Petersen v CIR [2005] STC 448.

[112]Petersen v CIR [2005] STC448,at paras 35−37.

[113]Petersen v CIR [2005] STC448, at para 96.

[114] M. Littlewood, “The Privy Council and the Australasian Anti-Avoidance Rules”, (2007) 2 British Tax Review, 175−205.

[115]C.H. Gustafson, “The Politics and Practicalities of Checking Tax Avoidance in the United States” in G.S.Cooper,TaxAvoidance and theRule of Law,(Amsterdam: IBFD,1997), at p 376.

[116] I. Richardson, “Reducing Tax Avoidance by Changing Structures, Process and Drafting” in G. S. Cooper, Tax Avoidance and the Rule of Law, (Amsterdam: IBFD, 1997), at p 327.

Previously published by the University of New South Wales – Australian School of Taxation (Atax), June 2008