4.3.5.4 General Anti-Abuse Rule

The ATAD1 GAAR

In order to address tax abuse situations that are not affected by targeted provisions, ATAD1 contains a General Anti-Abuse Rule (GAAR). Through the ATAD1 GAAR, the Directive aims to close loopholes for which there are no effective cross-border specific anti-abuse rules. GAARs within the EU should solely apply to arrangements that are not genuine, as taxpayers in principle have the right to choose the most tax efficient structure for their commercial affairs.1 The rule is formulated in a very general way and therefore applies to domestic situations, within the EU and with regard to third countries.2 In order to assess whether an arrangement should be considered artificial, Member States may examine all valid economic reasons, including financial activities.3

The ATAD1 GAAR prescribes that – for calculating the corporate tax liability – a Member State ‘shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances.’ An arrangement can consist of more than one step or part. An arrangement or a series of arrangements will be regarded as non-genuine to the extent they are not put into place for valid commercial reasons which reflect economic reality.4 As those arrangements are often realized within group situations, the ATAD1 GAAR is relevant for multinational companies.

Anti-abuse rules & the OECD MTC

As tax avoidance can be an issue in intra-group situations, the question arises whether the OECD MTC contains an adequate general anti-abuse provision via the PPT, or whether (elements of) the EU GAAR might form a relevant addition to the OECD MTC. This can be the case even though there is an important difference in scope of application of the provisions (i.e., an anti-abuse provision on a national vs. treaty level).5 The PPT will be applied to prevent the granting of treaty benefits in situations where, given all relevant facts and circumstances, it can reasonably be concluded that obtaining the treaty advantage was one of the principal purposes of the arrangement or transaction which provided that benefit directly or indirectly. As an exception to this rule, the treaty advantage will not be withheld in situations where granting it would be in line with the object and purpose of the provision in question.6

The two anti-abuse provisions are somewhat different in wording. First, the EU GAAR prescribes a non-genuine test. Such a test is not explicitly included in the PPT. That this is – according to the EC – a relevant difference is emphasised by the fact that the EC encouraged Member States to add the PPT to tax treaties in a modification explicitly including a non-genuine test.7 However, PPT application requires a review of all relevant facts and circumstances. If an arrangement is set up as part of a commercial core activity, and the form of the arrangement is not motivated by tax considerations or the realization of a tax reduction, it is unlikely that obtaining a tax benefit was the main objective. In short, this test seems to be similar to the EU GAAR one.

A second difference between both general anti-abuse provisions is the fact that the EU GAAR requires a tax advantage, whereas the PPT requires a benefit. From this difference in wording it could be concluded that the PPT has a broader scope than the EU GAAR. A tax advantage is likely to be an advantage in the field of national corporate income tax.8 In this regard, it seems necessary to make a comparison between the situation with and without the artificial arrangement.9 The term benefit as referred to in the PPT should be interpreted in a broad manner. It should for example cover the reduction, exemption, deferral or refund of tax obtained through the application of the relevant tax treaty.10 In fact, the situation before and after the use of an artificial arrangement should be compared. The route to determine whether there is a tax advantage, or a benefit therefore seems to be the same. A difference is that a treaty advantage does not necessarily lead to a tax advantage. There are also situations in which a taxpayer is worse off as a result of the application of a treaty benefit.11

From the wording of the ATAD1 GAAR it cannot be concluded with certainty whether a group approach should be applied. As the provision requires an assessment of all facts and circumstances, in my view this entails a group approach similar to the approach that should – in group situations – be taken in the PPT.12 This group approach in essence aims to prevent double taxation and unintended double non-taxation.

All in all, even though the PPT in the OECD MTC does not explicitly include a non-genuine test, in my view the PPT has a comparable or even broader scope than the ATAD1 GAAR.13 Additionally, the extent to which a group approach should be applied seems similar for the PPT and ATAD1 GAAR, as for both anti-abuse provisions all facts and circumstances should be taken into account. A change to the PPT to mirror the wording of the ATAD1 GAAR is therefore not necessary.