By William A. Ahern, Managing Director, Wealth and Tax Advisory Services (Asia) Limited, Hong Kong
In November last year, I attended the Peter Willoughby Memorial Lecture hosted by the Hong Kong University. Peter was a good friend of mine and a former colleague. It was given by Chris Evans, Professor of Taxation in the Australian School of Taxation (Atax), Faculty of Law, The University of New South Wales. The good professor’s lecture was entitled “Barriers to Avoidance: Recent Legislative and Judicial Developments in Common Law Jurisdictions”. In it, Professor Evans carefully examined the distinction between tax evasion, tax avoidance and tax mitigation through references to Commonwealth authorities and other sources. He also looked at the growth of tax avoidance activity, the reasons for that growth, why it was a worry, the various forms of tax avoidance and legislative and judicial responses to tax avoidance. It was a very good lecture well delivered and supported by a very good paper1. And it got me wondering generally about the distinction between evasion, avoidance and mitigation but, in particular, just how helpful judicial and other pronouncements about these concepts were in deciding cases. I first thought about the relevance of these pronouncements in the post MacNiven2 era in cases not dealing with specific or general anti-avoidance provisions. I then considered their relevance in such cases.
Professor Evans’ paper starts by looking at tax evasion and quotes from the OECD’s view of tax evasion, ie, that it 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”. He reminds us that there is both innocent non-disclosure and fraudulent non - or misleading disclosure and that the difference between tax avoidance and tax evasion is (as Denis Healey once famously quipped) “the thickness of the prison wall”.
Professor Evans then examines judicial and other attempts to describe “tax avoidance” and to distinguish it from “tax mitigation”. He notes Lord Hoffman’s cautions about using such descriptions of “avoidance” or mitigation” in absence of their specific use in a statute and moves on to quote the OECD, the Australian Review of Business Taxation and others in attempting to capture these concepts. He quotes at length from Lord Templeman in the Challenge Corporation Case3 and Lord Nolan in Willoughby’s Case4 (yes the same man in whose memory the lecture was given).
It is convenient to begin by looking at the utility of these expressions where there is no specific use of them in the taxing statute.
In looking at Ramsay5 post MacNiven, I returned to Gordon Fisher and Jonathan Shaw’s excellent monograph entitled “The Unmasking of Ramsay” (The Demise of the ‘Business Test’ Test) written by them soon after the House of Lord’s decision in MacNiven. In that case, Lord Hoffman revealed to us that the so-called Ramsay Doctrine was not, in fact, a judicial anti-avoidance doctrine based on the idea of a business purpose test but a decision which unshackled the courts of previously held notions requiring them to apply literal interpretation to taxing statutes as opposed to purposive ones. A return, some might say, perhaps optimistically, to what Sir Sidney Rowlatt said about how tax statutes should be interpreted in the Cape Brandy Syndicate Case6 in 1921:
Too wide and fanciful a construction is often sought to be given to that maxim, which does not mean that words are to be unduly restricted against the Crown, or that there is to be any discrimination against the Crown, in those Acts. It simply means that in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.
When we thought Ramsay was a business purpose test based anti-avoidance doctrine it mattered to label something as “avoidance” or “pre-ordained” or “circular” or “without business purpose” because those labels were pre-conditions for the application of the doctrine resulting in “fiscal nullity” or “fiscal disregard” of the offending behaviour. But how does it help to use these expressions when we are actually only concerned with discovering the true meaning of the taxing or relieving provision?
As Lord Hoffman tells us so eloquently in MacNiven, adopting these expressions effectively puts the cart before the horse (at 370-371):
I do not think it is helpful to introduce them. The fact that steps taken for the avoidance of tax are acceptable or unacceptable is the conclusion at which one arrives by applying the statutory language to the facts of the case. It is not a test for deciding whether it applies or not. If I may be allowed to repeat what I said in Norglen Ltd. (in liq) v. Reeds Rains Prudential Ltd. [1999] 2 AC1 at 3-14, [1998] 1 All ER 218 at 226:
“If the question is whether a given transaction is such as to attract a statutory benefit, such a grant like legal aid, or a statutory burden, such as income tax, I do not think it promotes clarity of thought to use terms like stratagem or device. The question is simply whether, upon its true construction, the statue applies to the transaction. Tax avoidance schemes are perhaps the best example. They either work (IRC v. Duke of Westminster, [1936] AC1) or they do not (Furniss v. Dawson, [1984 AC 474]. If they do not work, the reason, as my noble and learned friend, Lord Steyn, pointed out in IRC v. McGuckian, [1997] 1 W.L.R.991,1000 is simply that upon a true construction of the statute, the transaction which was designed to avoid the charge to tax actually comes within it. It is not that the statute has a penumbral spirit which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes” [my emphasis].
But what about cases where “penumbral spirit(s) which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes” do exist in the very real form of specific or general anti-avoidance provisions found now across the common law world? How helpful is it, when working out whether they apply to a transaction or scheme, to resort to the expressions of others who have tried to capture these notions? I would suggest that they are not very helpful at all.
Take the Willoughby Case which was, relevantly, concerned with whether the late Professor Willoughby could show that he had not acted with the purpose of avoiding liability to taxation (see Section 741 of the UK Income and Corporation Taxes Act 1988). In that case, Lord Nolan resorted to identifying “hallmarks” of both tax avoidance and tax mitigation, the latter presumably to identify what avoidance is not, and thus, what it is. Although it might have been a useful approach in that particular case (it certainly turned out to be for the successful professor), I contend that it is more likely to confuse than enlighten someone looking at a different provision on another occasion.
The experience with general anti-avoidance provisions is no less unpredictable. Professor Evans looks at the New Zealand case of Peterson v. CIR7 where the Privy Council examined s.99 – New Zealand’s then general anti-avoidance provision:
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). 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”.
In Australia, the general anti-avoidance provision, Part IVA, is concerned with denying tax benefits to taxpayers where it is reasonable to conclude, having regard to a fairly comprehensive list of factors (or hallmarks), that the primary purpose of entering into the transaction or scheme in question was the obtaining of the tax benefit. I suggest that, in these circumstances, resort to the conceptual expressions what constitutes “tax avoidance” or “tax mitigation” is neither here nor there. It does not matter whether the transaction in question falls within others’ definition of “tax avoidance” or “tax mitigation”. If the transaction or scheme is found to have the requisite purpose, the tax benefit is denied and, if not, it is not.
The real problem with utilising these expressions is, as Lord Hoffman points out, that they tend to pre-judge the issue at hand and therefore obfuscate rather than clarify. This is especially true of general taxing provisions or anti-avoidance provisions where the word “avoidance” or its variants do not appear.
So, unless we are dealing with decisions on the exact words in the same statute, let us lawyers and other tax specialists banish the following expressions from our lexicon: “unacceptable tax avoidance” or “unacceptable tax advantage”; “tax mitigation”; “acceptable tax avoidance” or “acceptable tax advantage”; and “abusive tax schemes”.
They might be useful everyday layman’s terms8 or political or moral expressions to describe conduct acceptable to some but not others but they do not promote clarity of legal thought nor certainty of legal outcome.
In conclusion, I suggest we need only the two expressions used in Chinese: “tax stealing” and “tax saving”. 
ENDNOTES
1 To be published in the next issue of the Hong Kong Law Review (Part 1 of 2007)
2 MacNiven (Inspector of Taxes) v. Westmoreland Investments Ltd. [2001] ITLR 342
3 CIR (NZ) v. Challenge Corporation Ltd. [1987] AC 155
4 IRC v. Willoughby [1997] 1 WLR 1071
5 W.T. Ramsay Ltd. V. IRC [1992] AC 300
6 Cape Brandy Syndicate v. Inland Revenue Commissioners [1921] 1KB 64 at 71
7 Peterson v. CIR (NZ) [2003] STC 448
8 Note, however, that terms such as “unacceptable tax position” and “abusive tax position”, barely defined, have found their way into New Zealand’s, penalty provisions - see ss. 141B and 141D of New Zealand’s Tax Administration Act 1994 |
