Substantive Rights of Taxpayers in an International Context – Part 2

Piyush Baid, B.Com (Hons) (Cal), FCCA (London), MCSI (London), ACIArb (London), ADIT (London), CertBV (Paris)

Having dealt in substance the basic legal principles governing what could be a basic minimum of taxpayer’s rights, herein with this article we deal the guiding principles and also jurisdictional application of the same.

When considering taxpayers rights, it is an interesting aspect, that unlike the others in the scope of international law, this one is derived not from within nations, but rather maybe from an individual to a jurisdiction. This is a peculiar feature of International Taxation.

For the purpose of furtherance of taxpayer’s rights in an international context, the International Law Association from the study group concerning Taxpayer’s rights (Kyoto, 2020) has recommended the creation of a draft model Charter of Taxpayer rights1, and the International Fiscal Association on its part had in the 2015 congress at Basel2, identified about 90 items of best practices for furtherance of the agenda of protection of taxpayer rights, the International Bureau of Fiscal Documentation and its project “Observatory on the Protection of Taxpayers’ Rights”3, have been proactive in their quest for establishing a best practice draft for protection of taxpayer’s rights. Notable contributions have been received from the International Association of Tax Judges as well.

Keeping this in mind we would be dwelling on some of the jurisdictions and their adopted standards in the matters concerning taxpayer’s rights;

Brazil: Brazil is principally a civil law jurisdiction, with the constitution being the fundamental binding document and spirit. As with civil law jurisdictions, the rule of law is the primary driving force, and citizens are subject to the law and legal procedures. Correspondingly, it also holds that state officials, and by extension, the revenue is also bound for action only as mandated by law. Major constitutional reforms were carried out in the year 1988 and a separation of federal and municipal power was done, by extension of the reforms, taxes take effect with competence granted by the Constitution. Taxes are attributed to and from the federal government, state, and municipal levels, as envisioned by the reforms, which shall be made effective after proper deliberation mechanisms by the National Congress, State Assemblies, or Municipalities as and when required. Economic and juridical double taxation is unconstitutional and prohibited. As with India, the division of powers has led to a complexity in tax rules. As to whether, a simplified system like GST would be effective, this is an unchartered territory.

National complimentary Acts are implemented in a harmonized manner, by either of the Federal, State or Municipal Authorities. They also prescribe modes on tax related issues like taxpayers’ rights and obligations, tax bases and rates, procedures and manners tax assessments, availing of tax credits, other complementary statutes including those of limitations for tax notices and collection. Ordinary acts can change taxes that are within the competence of the federal government, including individual income tax, corporate income taxes, excise tax and social contributions. All definitions under tax laws are delegated to the legislature. Rates, tax liability and rights, tax bases, penalties all come under the domain of definition by legislature. All taxing benefits, suspensions, preferential treatments, enforcements are also subject to enactments by legislature. The Brazilian Supreme Court has limited the powers of tax administration and tax legislation4. Principle of initial onus on the taxpayer is clear and principles of natural justice apply.5 There are no general discretionary powers to the tax administration, and any such power is granted by specific statute only.

Brazil doesn’t have any place for retroactive/ retrospective law in taxation, and there is a time lag of 90 days for application of taxing statutes/ rules and rates. Protection against retrospective/ retroactive application of law is subject to fundamental rights and rule of law, and is not specifically mentioned in the constitution. Fundamental rights are more often decided by deliberation amongst judges without according any reason for their decision as such. However, generally, the judicial process takes care that fundamental rights are not overridden6.

In matters of GAAR, Brazilian tax code has no specific provisions for GAAR or SAAR, however, it is mentionable that there are many other alternative measures of tax abuse. Although Article 116 of the Tax Code enacts a similar proposition, there has been no significant achievement in this aspect since its enactment in 2001. Alternative measures to combat tax evasion incorporated in the tax code are worldwide taxation, formulatory transfer pricing rules, thin capitalization rules, rules on distribution arrangements which conceal the true nature of transactions, differentiated tax treatment for tax heavens and low taxed jurisdictions, high administrative penalties and criminal sanctions.

Russia: Article 57 of the Russian constitution inter alia mandates that all Russian residents are subject to taxing obligations, which shall be determined singularly by the legislature. Taxes are a sovereign right as such. Residents are obligated to pay taxes under the tax code; however, this is subject to the fundamental principles that only whatever is mandated legally should be paid. This mandate applies both to any levy or tax by whatever nomenclature referenced7, and integrally introduces non-discrimination, non-arbitrariness, allowing free movement of goods within the Russian confederation, fairness, and bias in favor of the taxpayer in case of any doubt or uncertainty8. Also defined is that tax or levy of whatsoever nature may only be levied in accordance with the parameters defined in the Russian Tax Code. Thereby ensuring that taxpayers rights are protected at least on the code level. In particular it is to be noted the bias in favor of the taxpayer in case of any ambiguity. Retrospective taxation, wherein the tax payer is left worse of is prohibited by the Russian Tax Code explicitly9. However, the converse10, i.e. reduction/abolition altogether of obligations, and measures regarding protection of taxpayer’s rights might be applicable with retrospective effect. Furthermore, any measure for new taxes takes place only from January 1 of the subsequent calendar year. Any measure for reduction however, comes into force from the day of the official publication thereof.11

Russia in terms of GAAR, was more or less a judicially determined jurisdiction12, till about 2017, when on 18th July, GAAR was formally introduced in the Russian Tax Code the Federal Law No. 163-FZ “On Amending Part One of the Tax Code of the Russian Federation” (Law 163- FZ), which supplemented the Tax Code with Article 54.1 “Limits on the exercise of rights to calculate the tax base and (or) the amount of tax, fee, and insurance premiums” (Russian GAAR article)13. Further clarification on this was issued by way of a guidance letter. Interestingly, as a matter of taxpayer protection and ease, the initial onus on proving tax abuse is on the authorities.

Japan: Japanese residents are subject to taxing obligation under Article 30 of the Japanese Tax Code. However, the rights of taxpayers are protected whereby no new taxes or measures

of revenue might be imposed on the taxpayer unless permitted by rule of law14. In addition to this Supreme Court of Japan has held in a catena of cases15 that rule of law in fairness mandates that provisions regarding rules, rates, assessment procedures, collection procedures, should be clearly laid down in the piece of taxing legislation. The two cardinal principles of “no taxation without representation” and certainty in taxation are followed consistently. Arbitrariness in taxation is there in practice, but the courts have regularly intervened and upheld the word of tax law in Japan.16

Section 17 of the Japanese Tax Code17, had an element of GAAR in that, transactions which concealed tax liability, within family members, could be overridden by the National Tax Authority of Japan. In 2001, Japan went ahead and introduced GAAR for corporates, and since then there have been a significant number of rulings in matters of GAAR18.

China: As expected, information on taxpayer’s rights is notoriously difficult to obtain and interpret. So much so, that even when the International Fiscal Association in 2015 at the Basel Congress released The Practical Protection of Taxpayer’s rights, information from China was notably absent from the regional Cahiers19. The National People’s Congress in China has been assigned the task of defining tax legislations and its rights and obligations, including that of tax assessment, recovery, collection, non-discrimination, rates et al. Article 820 of the Legislation Law of the People’s Republic of China deals inter alia of taxation, and it states that taxes and other economic measures are to be governed by law alone. Judgements of Tax Tribunals are regularly published21 and used by the tax fraternity. But taxpayer anonymity is not followed in China. Chinese tax laws, have criminal penalties for tax misdemeanor, in addition to civil penalties that might be imposed. The principle of “Non bis in idem (no legal action can be instituted twice for the same cause of action)”, is not in vogue in China as part of tax administration. However, a tax court and a criminal court cannot try for the same set of facts. Like India, the tax administration can attach a bank account without necessarily approaching the judiciary. Tax payments can be deferred subject to meeting certain obligations. Interestingly, in matters of Information exchange, it’s the right of the taxpayer to be informed prior to such exchange. Taxpayer can request a hearing before assessments, which are generally completed within 3-4 months of initial notice. Specially privileged people like old age, special needs have access to special means within the tax administration for their convenience. Rectification procedures post assessment are available in case of incorrect levy and/or collection of improper tax. However, notably, the “naming and shaming” regime exists in China. Subject to limitations, information exchanged between advisers and taxpayers is privileged information. Taxpayers are entitled

to know detailed outcome of the assessment process. Taxpayers have the right to avoid self- incrimination in tax assessment processes.

China had incorporated GAAR in its tax legislation way back as 200822. China is also a member of the Inclusive framework of the MLI. Operationally, China also introduced SAAR’s as an anti-avoidance measure in 2013 viz (1) a trans- fer pricing rule, (2) a cost-sharing arrangement rule, (3) a CFC rule and (4) a thin capitalisation rule.

ISRAEL : The Israeli tax code23 follows the rule of law of the Israeli legal system. Article 124 of the said code inter alia mandates :

“1. Taxes, compulsory loans, and fees

  1. Taxes, compulsory loans and other compulsory payment shall not be imposed, and their amounts shall not be varied, save by or under Law; the same shall apply with regard to fees.
  2. Where the amounts of any taxes, compulsory loans or other compulsory payments, or fees, payable to the Treasury are not prescribed in the Law itself and the Law does not provide that the amounts prescribed therefor by regulations shall require approval by the Knesset or by a committee of the Knesset.”

The principle of no taxation without representation is a fundamental character of the Israeli Tax Code. Tax legislations as well as orders are subject to judicial review, mainly on two accounts :

  1. Basic Law Human Dignity & Liberty
  2. Basic Law Freedom of Occupation

The judicial process, is the ultimate interpreter of laws in Israel. However, as a measure to enhance tax certainty25, the Tax Administration can apply for an advance ruling in certain matters. Purposive interpretation is generally followed by the Israeli Judiciary.

In matters of GAAR, judicial principles are the guiding light. Section 86 of the Income Tax Ordinance specifically incorporates GAAR into

the Israeli Tax Code. However, in applying this artificial arrangements for tax avoidance principle the courts26 have generally struck a fine balance between taxpayers substantive rights and right to collect revenue on part of the authorities. In one notable judgement27

Admittedly, this article misses some important jurisdictions viz Netherlands, USA, United Kingdom, Australia etc, but then material for those countries are more generally available for study, over various resources.

  1. https://www.ila-hq.org/en/documents/study-group-international-tax-law-final-report-kyoto-2020
  2. Page 74 of the General Report by Philip Baker KC, Field Court Tax Chambers, Gray’s Inn, and Pasquale Pistone, Former Academic Chairman, IBFD.
  3. https://www.ibfd.org/sites/default/files/2021-09/2020 IBFD Yearbook on Taxpayers’ Rights(1).pdf
  4. Supreme Federal Court of Brazil, extraordinary appeal of 20 May 1997, no 182971/SP [1997]. Superior Court of Justice of Brazil, special appeal of 12 September 2006, no 724779/RJ [2006]. Supreme Federal Court of Brazil, extraordinary appeal of 20 March 2003, no 343446/SC [2003]
  5. Supreme Federal Court of Brazil, interlocutory appeal of 27 November 2012, no 782205/RJ [2012]; and Superior Court of Justice of Brazil, special appeal of 23 May 2012, no 1298407/DF [2012].
  6. Supreme Federal Court of Brazil, in extraordinary appeal of 15 March 2017, no 574706/PR [2017]
  7. Article 3 of the Russian Tax Code
  8. Article 3(7) of the Russian Tax Code
  9. Article 5(2) the Russian Tax Code
  10. Article 5(3) and 5(4) of the Russian Tax Code
  11. Article 5(1) of the Russian Tax Code
  12. For Ex : Ruling No. 53 of the Plenum of the Supreme Arbitration Court of 12 October 2006 “Concerning the Evaluation by Arbitration Courts of the Legitimacy of the Receipt of a Tax Benefit by a Taxpayer”
  13. https://www.consultant.ru/document/cons_doc_LAW_220282/
  14. Article 84 of the Japanese Constitution
  15. Supreme Court of Japan, judgments of 23 March 1965 [1965], Supreme Court Civil Cases Reporter (9)3, 336, and of 27

    March 1985 [1985], Supreme Court Civil Cases Reporter, 39(2), 247.

  16. https://www.internationaltaxreview.com/article/2a69gcrpxpksk5a59v9q8/japan-supreme-court-affirms-rule-of-law-in- japanese-taxation
  17. Enacted in 1923
  18. IBM v NTA Supreme Court of Japan, judgment of 18 February 2016, H27 Gyou-Hi [2016], no 304, Tokyo High Court, judgment of 25 March 2015, H26 Gyou-Ko [2015], no 208, Tokyo District Court, judgment of 9 May 2014, H23 Gyou-U [2014], no 407, Yahoo/IDCF v NTA upreme Court of Japan, judgment of 29 February 2016, H27 Gyou-Hi [2016], no 75; Tokyo High Court, decision of 5 November 2014, H26 Gyou-Ko [2014], no 157; Tokyo District Court, judgment of 18 March 2014, H23 Gyou-U, [2014], no 228.
  19. https://www.ifa.nl/cahiers/2015/100b/general-report
  20. http://www.npc.gov.cn/zgrdw/englishnpc/Law/2007-12/11/content_1383554.htm
  21. https://www.ibfd.org/sites/default/files/2021-09/2020 IBFD Yearbook on Taxpayers’ Rights(1).pdf
  22. Ch 6 of the Enterprise Income Tax Law of the People’s Republic of China, promulgated by the National People’s Congress on 16 March 2007 with effect from 1 January 2008.
  23. Israel: Basic Law of 1975, The State Economy, 31 July 1975, https://www.refworld.org/docid/3ae6b5284.html
  24. Ibid above
  25. Art 158D of the Israeli Income Tax Ordinance, as of amendment 147 from 2006.
  26. Israeli Supreme Court, judgment of 31 July 2003, Tax Assessment officer for large enterprises v. Yoav Rubenstein Ltd, CA 3415/97 [2003].
  27. Israeli Supreme Court, judgment of 7 September 2000, Horowitz v. the State of Israel, CA 1182/99 [2000]

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