Vittoria Di Gioacchino
BLP, San Jose
vdigioacchino@blplegal.com

Report on a Taxes Committee session at the 2024 IBA Annual Conference in Mexico City

Thursday 19 September 2024

Session chairs

Guillermo Canalejo Uría Menéndez, Madrid
Joe Sullivan Covington & Burling, Washington, DC

Panellists

Marco Monteiro Veirano, Sao Paulo
Gabriela Pellón Galicia, Mexico City
Laeticia Fracheboud Homburger, Zürich
Sylvia Dikmans Houthoff, Amsterdam

Introduction

Corporate structures involving two or more jurisdictions that could take advantage of treaty networks and legal technicalities have been an important discussion topic on most international tax forums when it comes to debating tax evasion, as abusive tax planning has become a worldwide concern.

The implementation of general anti-avoidance rules (GAARs) has been an attempt to prevent the use of tax treaties to enable tax evasion, granting a country’s tax authority enough power to disregard a particular corporate structure or transaction, and deny a benefit granted by a double taxation treaty when tax avoidance could exist. Even so, the task of GAARs comes with challenges, as the interpretation of ‘when’ and ‘how’ GAARs should be applied can vary from one country to another.

This session discussed the status on the implementation of GAARs in Brazil, Mexico, Switzerland, and the Netherlands.

Panel discussion

Brazil

Marco Monteiro stated that Brazil does not have a properly regulated GAAR in its Tax Code. Hence, the tax authority carries out a ‘treaty by treaty’ analysis depending on the case, basing its analysis mostly on the limitation of benefits (LOB) clause and the principal purpose test (PPT).

Monteiro explained that Brazil has not signed the Multilateral Instrument (MLI). Out of its 36 treaties in force, only four (Argentina, Singapore, United Arab Emirates and Switzerland) comply with the minimum standard (LOB and PPT); another four treaties are awaiting approval in Congress with the incorporation of the LOB and PPT clauses (China, India, Sweden and Norway).

Additionally, the Civil Code includes certain provisions that allow the tax authority to disregard structures involving sham, fraud or abuse. Monteiro explained that:

‘Tax authorities have applied doctrines such as the step transaction, substance over form, business purpose and economic substance to challenge transactions and structures – even in the absence of sham, fraud or abuse – and the Administrative Tax Court in some decisions affirmed that the existence of a business purpose is an essential condition for the validity of the set up adopted by the taxpayer.’

There are not that many cases where the Tax Court has ruled regarding treaty abuse. Some examples include a ruling regarding an Austrian subsidiary that was disregarded by the tax authority based on controlled foreign corporation (CFC) rules; however, no ‘sham’ or ‘fraud’ was proved and the Court ruled that the Austrian subsidiary could not be disregarded if no abuse exists. Other interesting cases include an analysis regarding the tax treaty with Denmark and another one with Japan, where the Court decided that the absence of a LOB and PPT clause in the treaties prevented the tax authority to disregard the application of the treaty based on lack of economic substance, or beneficial ownership located in a third country.

Mexico

Gabriella Pellón presented Mexico’s position regarding GAARs. She stated that, as a member country of the OECD, GAARs were ‘enacted as part of Mexico’s commitment to international tax standards and combating tax evasion’, targeting transactions that lack economic substance or primarily intended to obtain a tax benefit.

Pellón explained that Mexico’s GAAR was introduced to the Mexican Federal Tax Code in January 2020. It is align with OECD guidelines, allowing tax authorities to ‘recharacterise the legal acts entered into by taxpayers when such acts are deemed to lack business reasons and generate a direct or indirect tax benefit’. She further explained that Mexico’s GAAR is based on three key features:

• the substance over form principle, where ‘transactions are evaluated based on their economic substance rather than their legal form’;
• the abuse of law doctrine, meaning that ‘transactions that are deemed abusive or intended primarily for tax avoidance can be recharacterised or disregarded’; and
• artificial transactions, which ‘identifies and disallows artificial arrangements designed solely for obtaining tax benefits’.

Additionally, it is important to consider the economic substance of the transaction, its business purpose and the intent of the transaction.

However, Pellón explained that, even though Mexico’s GAAR has been in place since 2020, it is not commonly used by the tax authorities to make tax adjustments. To this date, there are no administrative or judicial precedents regarding the application of GAARs.

Switzerland

Laeticia Fracheboud presented the GAAR situation in Switzerland. She indicated that Switzerland’s tax legislation does not include a GAAR; however, a general anti-avoidance criteria has been implemented based on rulings by the Supreme Court, where it is allowed for the tax authorities to disregard a specific transaction or structure based on the substance over form principle. It also has been established that ‘there is treaty abuse if the following conditions are cumulatively met: (1) a peculiar legal arrangement (ultimately, lack of substance); (2) application of the treaty – if granted – would lead to actual tax savings; and (3) sole intention of saving taxes’.

Additionally, Fracheboud explained that, when it comes to dividends tax and the application of treaty benefits, the Supreme Court has established that treaty abuse conditions should follow these considerations:

• a peculiar legal arrangement (lack of substance) – one or two of the below criteria needs to be met to have sufficient substance:
  • personal substance – having enough staff and offices;
  • functional substance – other equally important participations in other jurisdictions; and
  • financial substance – equity ratio equal to or above 30 per cent;
• a peculiar legal arrangement leading to an improvement of the refund position (an actual tax saving); and
• the sole intention of saving taxes.

The Netherlands

Sylvia Dikmans presented on the Netherlands GAAR application, explaining that, as in Switzerland, the implementation of a GAAR has been developed by the courts – basically the application of the substance over form principle to prevent situations that may contravene the law. She explained that, because there are no local anti-abuse rules, treaty abuse is usually targeted within the double taxation treaty itself, and ‘international law takes precedence over national law, where, if national provisions are incompatible with rules of international law, national provisions would not apply’.

Dikmans explained that the Netherlands usually tries to engage in anti-abuse provisions through double taxation treaties and:

‘seeks to insert two additional provisions to the PPT: (1) the PPT should not apply to an arrangement or transaction if the tax benefit would also have been granted without said arrangement or transaction; and (2) the authorities of a contracting state are obligated to consult the other contracting state about any intention the former may have of refusing treaty benefits pursuant to the PPT.’

Conclusion and final remarks

To conclude the panel, there was a case study that each of the participants analysed and discussed in relation to the applicable tax treatment in each of their countries.