Tax Abuse - Lessons from Abroad

Abstract

How does a government distinguish between tax planning and tax abuse? Most democratic societies agree that citizens have a right to limit their tax liability through tax planning. However, governments generally also agree that this right does not extend to tax abuse. Tax abuse substantially reduces government tax revenues and weakens the integrity of our tax systems and the efficiency of our economy. Thus, making this distinction between tax planning and tax abuse is critical. In an attempt to identify and counter tax abuse and its detrimental effects, the United States recently enacted an anti-abuse rule in Section 7701(o) of the Internal Revenue Code. Because tax abuse is difficult to legislatively define, Section 7701(o) relies heavily on the judiciary to make the ultimate determination of which transactions are abusive. This Article contends that the international experience with similar general anti-avoidance rules indicates that Section 7701(o) will not be a universal cure for tax abuse but can be an effective anti-abuse tool if certain judicial, legislative and administrative steps are taken. Therefore, it proposes a reform to Section 7701(o) that would counter the textualist trend and other judicial approaches that potentially undermine the statute while simultaneously increasing the statute’s fairness and predictability.

Keywords: tax abuse, GAAR, economic substance doctrine, Section 7701(o), Australian GAAR, New Zealand GAAR, Canadian GAAR, tax planning