An Assessment of Anti-Tax Avoidance Doctrines in the United States and the European Union

Abstract

This article analyzes the main anti-tax avoidance doctrines in the US and the EU. Part II considers the economic substance doctrine in the context of common law doctrines developed at federal level in the US to deny taxpayers expected tax benefits, namely “economic substance”, “substance over form”, “step transaction”, “business purpose” and “sham transaction”. Whilst this paper focuses on the economic substance doctrine, it is nevertheless relevant to review the other doctrines mentioned above, since it is the lack of a unique and simple interpretation which has led to the recent codification. The origin of the present economic substance doctrine derives from an analysis of Gregory v. Helvering and its subsequent implications in the US and overseas. In general, the doctrine has been applied to transactions where a taxpayer undertakes a transaction or a series of transactions which are technically within the legislative and regulatory framework but which produce some form of tax benefit which is unlikely to have been intended by Congress or the regulators. One of the main issues related to interpretation of the doctrine has been that two different approaches have been taken regarding its application. Certain US courts have applied a “conjunctive test” which requires the taxpayer to establish the presence of both “economic substance” and “business purpose” in order for the transaction to survive judicial scrutiny. Others have used a “disjunctive test”, in which a business purpose or economic substance is sufficient for purpose, and it is precisely this contradictory approach which highlights the lack of a single interpretation of the economic substance doctrine.Part III briefly analyzes the new sections of the Internal Revenue Code (§) 1409 (hereinafter, IRC) which incorporates §7701(o). § 7701(o) is reviewed together with the Joint Committee on Taxation’s (JCT) Technical Explanation of the new codification. It also covers the proposed “angel list” of approved transactions which did not succeed in going forward.Part IV considers one of the most criticized aspects of the codification, namely the penalty provisions applied to transactions deemed to be lacking economic substance under the code, including some possible adverse consequences of the imposition of such penalties.Part VI reviews the EU perspective of the “Wholly Artificial Arrangement” doctrine applied by the European Court of Justice (ECJ) to curb abusive transactions compared with the application of the economic substance doctrine in the US. Part VI also considers how EU coordination is constrained by voting unanimity and how the legislation affects anti-abuse regulations, since EU Directives on one hand contain anti-abuse provisions directly applicable to Member States and on the other member states have domestic anti-abuse provisions which can be limited by EU law.This Wholly Artificial Arrangement doctrine has never been stated as a doctrine itself. Part VI sets out to establish an understanding of, and common requirements of, this doctrine based on EU law and ECJ decisions.