A tax avoidance transaction is one that would not be adopted if tax-saving elements are not present. The rules of interpreting tax laws go hand in hand with tax avoidance. In doing so, we are simply asking how the courts deal with attempts to avoid taxes by the interpretation of tax legislation. In general, the courts have adopted three approaches toward interpreting revenue laws for tax avoidance, and they are the:
a) Traditional approach
b) Modern approach, and
c) Doctrine of form and substance
In particular, we have various provisions in the laws of Ghana which seek to curtail tax avoidance on the part of taxpayers. The Income Tax Act, 2015, (Act 896) has split anti-tax avoidance laws into two categories. Subsequent article will explain further their meaning; for now, the categories are:
a) General anti-avoidance – which is essentially the residual provision in Act 896, and
b) Specific anti-avoidance tax rules – which are provisions in Act 896 aimed at dealing with tax avoidance processes such as income splitting, thin capitalisation and transfer pricing.
The 1992 constitution provides that the power to impose tax obligations is vested exclusively to the legislative arm of government. In 2011, it was decided by the Supreme Court that strict interpretation is the only applicable rule of interpretation of tax laws in Ghana. So, this article seeks to assess the decision of the Supreme Court in view of tax avoidance.
What is tax avoidance?
According to Act 896, tax avoidance is an arrangement – the main purpose of which is to avoid or reduce tax liability. A tax avoidance arrangement is defined in the Revenue Administration Act 2016 (Act 915) as an arrangement that has as its main purpose the provision of a tax benefit for a person; or an arrangement where the main benefit that might be expected to accrue from the arrangement is a tax benefit for a person. The shortest definition according to Stephen Potters’ book on gamesmanship is “the art of dodging tax without actually breaking the law”.
More significantly, tax avoidance must be distinguished from tax evasion. Avoidance is legal; evasion is illegal. Essentially, a person who deliberately adopts one of several possible ways because that one will save him the most tax must be distinguished from the man who adopts the same course for the purpose of evading tax when it is due.
The attitude of courts to tax avoidance
Tax avoidance takes many forms. However, the comprehensive approach the courts have adopted is to interpret tax legislations for a taxpayer to comply with.
a) Traditional Approach
First, in using the traditional approac, what the court is interested in is what the charging provision in the legislation which imposes the tax says. So where it is not in the letter of the law, there will arise no obligation to pay tax. More so, there is no room for intendment when it comes to interpretation of tax legislations. The reason is simple: i.e., if you intend to take from someone, it must be very clear that parliament intended to take the money; otherwise the person must keep his money.
This is the dictum of Chief Justice Georgina Woods in the case of Multichoice Ghana Ltd. vs. The Commissioner, Internal Revenue Service: “My conclusion has been dictated by the strict constructionist approach to the interpretation of statutes reserved for fiscal legislation. The general principle is that tax statutes are to be construed strictly”. Viscount Simon LC in the Privy Council case of Canadian Eagle Oil Company Limited and The King [1946 AC 119 at 140] relied on Rowlatt J’s formulation of the rule in Cape Brandy Syndicate v IRC [1921 1KB 64, 71].
He observed: “In the words of the late Rowlatt J whose outstanding knowledge of this subject was coupled with a happy conciseness of phrase, ‘in a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used’.
In short, the law has always been generous of the liberty and property of individuals. If there is any doubt in the legislation, it must accrue to the benefit of keeping the property of the person. This is what constitutes the traditional approach, which is the strict literal interpretation of revenue laws.
b) Modern Approach
Second, in using the modern approach, the court will go beyond the strict literal rule to consider the context and intent of the framers of the tax law. In such situation, a court looks at the tax law from a more fiscal policy standpoint to ask: what is the intention of the law? Or what did the framers seek to achieve? And not simply what was written. By so doing, the court is demonstrating unwillingness to aid tax avoidance.
The principles behind tax legislation are not always clear. Policies are confused and objectives are obscure. The position is complicated by use of the tax system made by governments to fulfil social and economic goals, even though taxation may not always be the best vehicle for this purpose.
In addition, tax legislation is based on an uneasy combination of legal concepts and economic outcomes – which do not always mesh well together. Tax systems for a modern, sophisticated economy and complex legal system will inevitably reflect that complexity; but we have now reached a position where the length and intricacy of tax legislation is constantly under criticism from businesses and the professions.
But the court may end up allowing certain tax avoidance measure under the modern approach; however, this will be after it has interpreted any ambiguous law or any rule in the law having regard to the intention of the law maker.
c) Doctrine of form and substance
Third, in using the doctrine of form and substance, the Commissioner-General (CG) – exercising a quasi-judicial power, does not simply look at the transaction; the CG looks at the intention of the transaction. Thus, if you take a transaction, the CG will have to first understand what it means to the parties in transaction. After that, the CG will apply the general rules of law. In a decided case, the court came out with three main rules the CG will need to observe to obviate tax avoidance:
- The description attached to a transaction is not decisive of its true picture: So how the parties choose to call a transaction is neither here nor there. Sometimes the registered name of a business does not reflect the transactions undertaken, so there is a need to go into the transaction proper. The CG needs to carefully peruse the agreement to see whether or not the description is simply a matter of nomenclature or if it actually satisfies such a description. Indeed, the doctrine of form and substance is clearly represented in Act 896 as the general anti-avoidance provision. It provides that the Commissioner-General may recharacterise or disregard an arrangement which is carried out in order to achieve tax avoidance, where form does not reflect its true substance.
- Liabilities and rights created by fictitious transaction ought to be disregarded: Here, we are not just looking at how a transaction has been put out, but we are looking at the obligations of the parties. The CG is permitted when you read Act 896 to disregard these rights and liabilities where you are looking at a transaction which is fictitious or a sham, once that transaction is entered into to avoid tax. Thus, this rule gives the CG power to do so.
- The rights and liabilities arising out from the genuine transaction ought to be respected or upheld: However, the CG can look at the surrounding circumstances in determining the rights and liabilities of the parties in a transaction to decide on the tax obligations.
So, on the doctrine of form and substance, you need to look at each transaction, each right or liability that arises to see whether or not it is a genuine transaction or fictitious transaction.
Conclusion
Parliamentary intention can be expressed only through the text of the statute, albeit read in context. Obviously, the best way to give effect to parliamentary intention in tax law will be to express it clearly in the specific legislation and to have no ambiguity in the text or framework of the tax system.
In quoting Lord Hoffmann: “. . . tax avoidance in the sense of transactions successfully structured to avoid a tax which Parliament intended to impose should be a contradiction in terms. The only way in which Parliament can express an intention to impose a tax is by a statute that means such a tax is to be imposed. If that is what Parliament means, the courts should be trusted to give effect to its intention. Any other approach will lead us into dangerous and unpredictable territory”.
So, although we do not have enough Ghanaian cases that address this issue of tax avoidance, going by the decision held by the Supreme Court in 2011 the court is sticking to the traditional approach of strict construction or literal rule as the only rule of interpreting tax legislations for tax avoidance. This is because the Supreme Court or the judiciary is bound by statutes in the imposition of taxes, according to article 174 of the 1992 Constitution.
>>>the writer is a Professional Law Student. He can be reached on [email protected]
