Guest Blog – Abuse of Law in VAT: from Halifax to Ocean Finance
By Professor Rita de la Feria
Professor of Tax Law, Durham University; Programme Director, Oxford University Centre for Business Taxation. Writes here on an independent capacity.
The European Court of Justice (‘CJEU’), the highest court of appeal for EU legal affairs, has been consistently alluding to abuse and abusive practices in its rulings for more than thirty years, but for a long time the significance of these references was unclear. In all changed in the last decade, in particular with the Court’s decision in Halifax where it applied the newly designated “principle of prohibition of abuse of law” to the VAT area. Since Halifax, prohibition of abuse of law has firmly established itself as an EU principle – general or interpretative, the discussion is still ongoing – having been applied in many areas of law, not least in corporate income tax in Cadbury Schweppes. Recent jurisprudential and legislative developments, however, have highlighted the difficulties of applying the concept of abuse of law.
CJEU sets two part-test on abusive structures
According to the judgment in Halifax, an abusive practice will be found to exist where two conditions are met:
- the transactions concerned, notwithstanding formal application of the law, resulted in the accrual of a tax advantage, the grant of which would be contrary to the purpose of those provisions; and
- it is apparent from a number of objective factors, such as the purely artificial nature of the transactions, that the essential aim of those transactions concerned was to obtain a tax advantage.
The difficulties with applying this test became evident immediately after the decision was released. Given its vagueness, it was clear from the outset, that further guidance on the application of the test would be required, and thus new cases were likely to arise in this area. Indeed, insofar as VAT is concerned, soon after Halifax the CJEU was asked to decide in Part Service, and not long after that in Weald Leasing and RBS Holding. Many more cases applying the concept of abuse of law to VAT have been decided by national courts. Unfortunately – albeit unsurprisingly – the application of the concept has been far from uniform: not only have different courts taken different approaches to it, particularly as regards the criteria for determining the existence of abuse, but there have been different approaches depending on the subject area. Even within the tax area, there has been a marked difference between what constitutes abuse for the purposes of VAT, and what constitutes abuse for the purposes of direct taxation.
Using the same abuse test as for direct taxes
After the decision in Cadbury Schweppes, it appeared as if the Court would attempt to harmonise the concept of abuse of law by applying that used within VAT, namely in Halifax, to direct taxation. Instead, the recent decision in Ocean Finance appears to indicate the contrary: that the Court is applying the concept of abuse of law previously used within direct taxation, to VAT cases. The Court stated in that case:
“the contractual terms (…) may in particular be disregarded if it becomes apparent that they do not reflect economic and commercial reality, but constitute a wholly artificial arrangement which does not reflect economic reality and was set-up with the sole aim of obtaining a tax advantage” (our underline).
Are abuse and artificiality being wrongly conflagrated?
It seems that we are witnessing, therefore, a subtle, but clear, move towards equating abuse of law with artificiality. To our mind this is a dangerous development. Can an arrangement, which is not against the purpose of the law, and thus within the intention of the legislator, be deemed abusive solely on the basis that it was undertaken with sole purpose of saving tax? It is certainly true that in many situations an artificial arrangement will also be against the purpose of the law, but this is not necessarily the case. The CJEU found that this was not the case, for example, in Weald Leasing and in RBS Holding. How can an arrangement that complies with both the word and purpose of the law be deemed unacceptable? Concentrating only on artificiality, and equating artificial arrangements with abuse of law, thus allowing the executive branch to dismiss / ignore the law, cannot but raise serious concerns over the respect for the rule of law.
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