Fundamental rights as an alternative to restrain the reach of aggressive general anti-avoidance rules
December 2018 | EXPERT BRIEFING | CORPORATE TAX
During the second half of the 20th century, drawing the line between legitimate and illegitimate tax avoidance was a priority for many, including legal and accounting firms that built an important part of their budgets around the business of tax planning.
However, the beginning of the 21st century has seen the emergence of tax morality and tax shaming as political instruments used to condemn many forms of tax consultancy.
Consequently, in many countries, the current position is very clear – governments will not tolerate strategies intended to exploit gaps and loopholes in tax rules and will pursue many forms of tax avoidance as vigorously, or perhaps even more vigorously, than they will pursue the most barefaced facets of tax evasion, including mere informality.
As a result, several jurisdictions have hardened their regulatory frameworks in order to increase the reach of their general anti-avoidance rules. In the same regard, the Organisation for Economic Co-operation and Development (OECD) has launched several sets of rules and policies focused on challenging tax avoidance from an international standpoint, for example the Action Plan on Base Erosion and Profit Shifting (BEPS) project and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, among others.
Therefore, taxpayers have been bombarded with general and ambiguous rules designed to expand the scope of tax administrations with regard to tax collection.
Approach to the problem
The real problem regarding this stance is not the national and international institutionalisation of a particular philosophy regarding tax avoidance; ultimately, the government is the only entity entitled to set the line between legality and illegality and to determine whether certain behaviours are acceptable from a legal perspective.
The real problem is that, given the ambitious reach of most of the general anti-avoidance rules, many taxpayers have been affected by such rules despite having legitimate deductions or despite not having received the taxable income that a tax administration presumes or determines in a certain tax period under the law.
While the last decade has seen the rise of many rules, policies and theoretical concepts intended to restrain abusive behaviours of taxpayers in prejudice of tax revenue, we have not seen a correlative rise of specific rules and theoretical concepts intended to protect taxpayers against abusive rules or arbitrary policies regarding tax affairs.
Therefore, the objective of this article is to highlight the need to develop a stronger theoretical and regulatory framework regarding fundamental or constitutional rights for tax purposes and the importance of improving the composition of our tax and constitutional courts in order to obtain more equitable precedents in tax affairs stemming from the judicial branch.
Fundamental rights for tax purposes
Theoretically speaking, fundamental rights are merely human rights recognised on a constitutional level as a boundary to the governmental activities developed to follow certain policies or to pursue certain objectives to benefit the community.
Thus, the constitutional doctrine on fundamental rights is mainly based on the premise that the individual has certain basic rights which cannot be disrupted, even for the benefit of collective interests or based on a reason of state.
The fundamental rights doctrine is inherited from modern constitutionalism, based on some of the ideas and ideologies stemming from the French revolution; ideas such as the revolutionary transition from an ex parte principi to an ex parte populi understanding of political powers, from the international boom in the recognition of various human rights in several treaties during the 20th century, and from theoretical works developed by several authors, including Norberto Bobbio, Luigi Ferrajoli, Ernesto Garzón Valdéz, among others.
However, although we have witnessed the development of a rich catalogue of human and fundamental rights in certain areas, such as criminal affairs, the theoretical and regulatory advances regarding human or fundamental rights for tax purposes are very poor.
For example, in Mexico, only a few constitutional rights regarding taxation, such as proportionality and equity in contributions, are recognised. None of them are related to basic guarantees during tax audits and none of them are recognised in international instruments, either tax treaties or human rights conventions.
Of course, this is not a coincidence. From a philosophical standpoint, it is easy to believe that even the worst criminal deserves the presumption of innocence principle or the non bis in idem principle – the principle that establishes that no legal action can be instituted twice for the same cause of action. However, when the application of some human rights to tax issues also have budgetary implications, it is harder to assume a protective stance in favour of the individual.
Nevertheless, if governments want to be coherent with the universal recognition of basic human rights of individuals over the states’ interests, taxpayers’ rights should be a legitimate concern for any government, as important, or even more important, than tax revenue.
Some basic tax rights
In that sense, it is imperative to develop a richer theoretical background regarding basic tax rights and to extend the reach of existing fundamental rights to particular tax cases.
For example, in many cases the ambiguity of general anti-avoidance rules has infringed taxpayers’ right to legal certainty. Therefore, it is necessary to define how ambiguous an anti-avoidance rule can be, before it prejudices such a basic right.
In the same sense, some jurisdictions recognise taxpayers’ right to proportionality and equity in contributions. This right is equivalent to the economic notion of vertical and horizontal equity. However, there are no real parameters to determine when a certain contribution becomes confiscatory.
On the other hand, sometimes the constitutional order does recognise certain tax-related rights, but there is a notorious absence of tools through which such rights can be effectively exercised by the taxpayer.
For instance, in Mexico any revenue obtained by the government is utilised to satisfy public needs. However, there are no real tools through which the taxpayer can exercise such a right. Of course, taxpayers can get access to some information regarding public spending, thanks to transparency rights, but cannot institute legal actions or be compensated in any manner for irregularities in public spending.
Under these circumstances, it is crucial to promote a change of perspective more suitable from a human rights standpoint. Instead of blaming certain taxpayers for the government’s budgetary problems, states need to start assuming responsibility for irregularities in the use of public resources and their occasional lack of capacity to pursue genuine tax evasion.
Tax rights during tax audits
Additionally, it would be valuable to extrapolate some of the basic procedural rights recognised for criminal purposes to tax audits. For instance, the non bis in idem principle could be expressed in tax affairs as the right to not be audited twice for the same contribution and period. Although this right is already recognised in some jurisdictions, it can hardly be labelled currently as a constitutional or human right.
Also, the presumption of innocence principle could be expressed for tax purposes as a general ‘bona fide’ presumption regarding the taxpayer´s behaviour. Such a right would force the tax authorities to demonstrate the factual basis for some of the typical and most ambiguous accusations in tax affairs, such as artificial or simulated agreements, the non-existence of transactions and a lack of business purpose.
In that sense, it could be helpful to recognise some basic rights regarding tax audits, and to borrow some procedural basic rights already recognised in criminal affairs, as in both cases it is important to balance the state’s interest in pursuing crimes and collecting tax revenues with the taxpayer’s right to a fair and due process.
Efforts aimed at developing a strong theoretical and regulatory framework for basic tax rights may enrich and strengthen legal defences for taxpayers against illegal actions committed by tax administrations.
One fundamental step would be to revise the procedures for selecting judges and magistrates for tax and constitutional courts. Concerns over democratic legitimacy have led to excessive intervention of the legislative and executive branch in such procedures. It is important to develop an impartial and independent procedure in favour of jurists with a proven track record and competence protecting taxpayers and upholding tax law. Otherwise, the decision to apply or extend the reach of fundamental rights to tax affairs will rest with the courts, overseen by judges and ministers devoted to the executive or legislative branch.
Additionally, it is important to create autonomous entities to protect taxpayers against abuses committed by the tax authorities, with real faculties to overrule, in certain serious cases, illegal tax assessments.
Finally, it would be valuable to promote more significant oversight of tax affairs by international organisations, to put more pressure on governments with illegal tax stances.
We have a long way to go to develop an acceptable catalogue of rights that effectively protect taxpayers against injustices committed by some tax administrations to achieve their yearly revenue goals. However, hopefully one day human rights applicable to tax issues will be a concern just as great or even greater than the fight against tax avoidance, base erosion and profit shifting.
Hopefully, then, the efforts of the OECD will not be focused merely on generating sophisticated general anti-avoidance rules to pursue base erosion and profit shifting, but also on proposing and promoting rules to protect individuals against abuses committed by certain tax authorities.
Jorge Arturo Rodríguez Ruiz is an associate at SMPS Legal. He can be contacted on +52 (55) 5282 9063 or by email: firstname.lastname@example.org.
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Jorge Arturo Rodríguez Ruiz