The taxpayer in any taxing ecosystem is the most underrated but yet the most valuable part. He is the salt, which is the most unassumed part of the tax monetary chain, without whom no fiscal satisfaction can be derived. He is the unpaid worker of the central government, who pays to work for the government, without necessarily having to have any criteria for the qualification, and neither does he ask for any.
But, ask any professional or the authority, and the taxpayer always comes out to be the most problematic part of the equation, consciously suppressing the fact that without the taxpayer, neither the professional nor the authority survive. Taxpayers finance the operations of authorities, are responsible for the subsidies and prestige of institutions like the IIT’s and IIM’s, or the medicinal studies, but, they are seldom given credit for their contribution towards financing the national or international ecosystem. Indisputably, taxpayers are to each jurisdiction, what sugar is to sweets. But, have we ever heard about the taxpayer being celebrated on a large scale? No, but authorities are and professionals are.
At the end of it all, tax is but a cost of survival in a society that is borne by the taxpayer. Better arranged societies have a general higher incidence of “such cost” as opposed to societies where social and economic quality of life is inferior to those.
Which begs the question, if the taxpayer, is so underrated and vulnerable, and possibly “exploited”, what do taxing ecosystems offer in terms of the rights of the taxpayer, what are the protections that are in place, so that the “cost” of survival doesn’t outperform the “exploitation”. Which in all fairness are the substantive hallmarks of an effective taxing ecosystem?
The following are a series of thoughts by the present author on the largely unexplored domain on taxpayers’ rights in an international arena, where soft law prevails over hard law, for much of the area, and diplomatic interests override even soft law. A key area of the present discussion would arrange itself within the tax ecosystem around independent, private persons. Arranged in a two-part series, the first part (present) deals with principally what the author conjures, a concoction of relevant principles on international tax payer rights, and the second would deal with how those principles are dealt with in principal jurisdictions in Africa, Asia, Australia, Europe, and North and South America respectively with a particular review of Taxpayer’s Charters.
Public International Law has long been an exclusive forum for largely salt and pepper International Law practitioners who do not regard tax as a pure subject of law and much less for any rights. But international tax law poses a peculiar matrix, more so, with the intertwining of public and private international law, owing to the public nature of tax law and its interposition by its public authorities, with its private interaction with the taxpayer, in some cases, and also sometimes as an extension of soft law, (producing effects on taxpayers as if it were a mere exercise of sovereignty of the state concerned) and in other cases, forming a totally public interaction within states concerned directly.
Any taxing jurisdiction, in the international arena, is putatively within its rights to tax subjects within its defined domain, however, this is subject to co-operation of a defined nexus. Although there is some disagreement between scholars and practitioners alike, but by and large, there is now a generally positive answer to the very famous question by Avi-Yonah “Is there a customary International Tax Law”?1. The view espoused 2comes out that there is (and the same has been supported judicially as well as in administrative practice), and within the ambit of which no domestic taxing system would be applicable to any taxpayer unless there is by and large either a personal or a territorial or quasi functional-territorial nexus (POEM et al.). Also pertinent to note is the fact that all across the spectrum, a general consensus exists on treaty based taxing systems in that they and their interpretations and commentaries are mostly based on either of the three most popular (OECD, UN, US) models, so as to provide some sort of consonance of analogy across the board, especially in matters of tax set- off, anti-abuse, fighting aggressive tax planning and avoidance, lending credence to the fact there is a coordinated effort leading towards customary law. This enhancement has gained more momentum during the fin de siècle and the earlier part of the 21st century, owing to the reactionary measures of jurisdictions, towards aggressive tax planning of MNE’s.
However, this entire sphere of co-ordination for protection of the tax bases of jurisdictions, has by and large been confined to public international law, so much so that states have generally assumed that taxes and thus rights emanating from them are by and large subjects between themselves, and that any consequence arising from such co-ordination are only for the benefits of the states. By and large there seems to be no interest, or maybe a perceived reluctance of states to put the interests of taxpayers when discussing or negotiating respective public international tax law. Or maybe just maybe, upholding taxpayers interests might be their Achilles’ heel.
Protection of taxpayers from abuse has been by and large a domestic phenomenon. The regulation of taxpayers rights has historically been a sovereign subject, so much that any attempts to regulate the same by way of private international law has not gathered any steam whatsoever. It would thus be painfully excruciating to point out a complete absence of substantive rights of a taxpayer in the international tax law arena.
Although, there have been attempts3 by some jurisdictions to allow for and conduct MAP4 proceedings (for in order to protect taxpayer’s) by and large attempts have proved unsuccessful, like for instance, the colossal failure of the Glaxosmithkline case5, in which due to the failure of the United States IRS and the United Kingdom HMRC to come up to an agreement over a corresponding adjustment, Glaxo had to cough up a princely US$ 1Bn, to buy peace with the IRS.
Over the course of the past four decades or so, owing to arising and rising complexities in tax laws and the frameworks, allegiance to substantive rights of taxpayers have slowly been gaining traction, especially over situations, wherein despite the presence of the more effective soft law, the rights of the administration trump over remedies to the taxpayer.
For to delve into what could be substantive rights of taxpayers in an international context, it is necessary to take a detour and go back to the founding father of modern taxing systems Adam Smith  which forms the very basis of almost all. To quote him “All nations have endeavored to the best of their judgement, to render their taxes as equal as they could continue: as certain; as convenient to the contributor, both in the time and in the mode of payment, and in proportion to the revenue, which they brought to the prince, as little burdensome to the people”. Of course, his text was with allegiance to the British Crown, but, the message goes through. Emphasizing the importance of his “canons” from the days of foundation of modern taxation, or at least the system which is mostly in practice.
With the advent of the modern-day digital economy, as with all things, the canons of an efficient taxation system have undergone a sea change, and in an age wherein access to the tax payer has become relatively easy, it becomes pertinent that rights of the taxpayer are protected in an international as well as a domestic context.
It is of course undisputed, that the protection as afforded should have some defined principles or guidelines, which should be unambiguous.
In the opinion of the author the foremost legal principles, that should be adhered to while designing anything for legal rights in fiscal matters, should at its very basic be backed by the following
- Consistency of fiscal law8: Although a subject of common law jurisdictions, it is nonetheless expected, that in all fairness, laws should be applied equally and without unjustifiable differentiation. Unless the statue provides for differentiation on treatment on account of special factors, like natural or legal origin, statute should provide for no other discrimination (for example gender, race or status), which renders, one person in unfair state of fiscal obligations as to the other bearing similar Furthermore, while designing any fiscal system, it must be borne in mind that, the person subject to the fiscal laws, should be aware of what is the reason for fiscal action, and what might be the consequences of his responses to such actions, both by law as well as I fiscal terms, at the time of action by the taxpayer. Although there are multiple cases of ambulatory treaty interpretation in soft fiscal law9, but, the approach should be avoided altogether, in taxpayer interest, as it leaves the taxpayer vulnerable to arrange his affairs, which should be the first and foremost right10. For the sake of discussion, it is important to distinguish between, consistency over a singular taxpayer over a number of years, and between different taxpayers in the same year. While the former may take the form of evolution of fiscal systems, the latter is the focus of this discussion on protection against any sort of discrimination11. It is vital that there be consistency in approach towards the taxpayer in private international law, as any inconsistency in approach for example in the case of corresponding adjustments, might lead to absurd results, and results which might lead to unfair discrimination leading to usurpation of rights of the taxpayer, and in fact hamper the very intention with which soft law was devised.
- Precise definitions and context: Economic activities are the very essence from which fiscal systems draw their survival. While in the dynamically changing world of today, with particular reference to fiscal abuse and avoidance, it is literally impossible for fiscal structures to adhere to a strict construction as per defined proverbs in law12, it is nonetheless, in the interest of taxpayers in particular, the majority of whom do not engage in fiscally abusive practices, that precise definitions be afforded so that they can be aware of fiscal outcomes, when they engage in Precision also allows professional13 and economic interpreters, to predict outcomes of fiscal predicaments with a reasonable certainty and to advise non-technical people in the aforementioned matters and also create an atmosphere to healthy fiscal compliance. The broad distinction that could lead to a bridging of this gap, would possibly come from the intent of the people entering into the transaction. If inherently abusive from its construction, then possibly leeway’s from precise context might be justified, however, invocation of an omnibus provision like a GAAR, without elements of abuse from the taxpayer might not be justified. In this context, we would be looking at provisions from different jurisdictions angle in the coming part, however, essential safe guards have to be in place to protect the taxpayer from such provisions, and taxpayers would be well within their rights to agitate against omnibus provisions in case of non-abusive practices.
- No retrospective/retroactive application of law: This has to be the bane of all things in fiscal outcomes. The most famous Vodafone14 case and its fallout in the international arena, gives an inkling at how the international fiscal community abhors retrospective amendments and that too of these Legal certainty being a basic principle of fiscal statutes, retrospective amendments tend to overturn the very basic premise. It delves to attempt to alter the very framework in which the taxpayer had taken the decision and manner in which to perform particular tasks. Very often larger businesses, which take strategic calls, often take years to implement them, and in those cases the consequences can be disastrous for the business. So unless, the very strategy involves abuse of fiscal structure of a jurisdiction, or abuse of a treaty network, with the intent to obtain unfair and/or unintended treaty benefits, as one of the principal objectives15, taxpayer interests should be protected. It emanates principally from the doctrine of legitimate expectation whereby a judicial review in administrative law can be made to protect a procedural or substantive interest when a public authority rescinds from a representation made to any stakeholder in an international/ domestic arena. It again emanates from the principles of natural justice, and it’s principal purpose is to prevent authorities from abuse of power. Although some retrospective application cannot be ruled out16 in order to combat fiscal abuse, however, this practice is by and large not to be looked favourably upon, and should be principally avoided considering the primacy of natural justice.
- Tax Rulings : Judicial ruling on items of fiscal interest and controversy, provide the taxpayer with certainty regarding his affairs. Quite frequently17, they are used to provide answers to vexed issues between taxpayers and fiscal authorities. Taxpayers from more or less in almost all jurisdictions, take comfort from the fact that judicial rulings provide a finality to disputes and the resultant is generally accepted by authorities. Frequent issues in an international context could be related to PE issues18, Arm’s length price acceptance19, Corresponding adjustment implications, non-discrimination20, and also with relation to certainty of interpretation of bilateral and multilateral conventions etc. It also provides confidence to the taxpayer, that unlike the relative reluctance of administrative authorities to accept international soft law principles, Higher judicial tax rulings generally provide for acceptance of the same. Even the oft disputed ALP concept although might lead to a different results from different jurisdictions, but still there is a semblance of a perfect answer, which settles a dispute. Although the author at this instance would be reluctant to comment personally on the certainty of tax rulings as binding on authorities21, and acceptance by authorities, it goes without saying that unless this aspect is followed as a religion, by both taxpayers and authorities, the whole fiscal system would collapse like a pack of cards. Of particular interest as in contemporaries is the conflict between the position of the CBDT22 and Article 18 of the Treaty of Functioning of the European Union, (which your author would be making a comment of in a short sphere of time, please watch this space).
- Application of soft law over hard law : Soft Law and hard law are two of the most debatable issues as far as taxpayer rights are Soft law is what are voluntary obligations that are submitted to by a jurisdiction in either matters of international law, for e.g. the Vienna Convention, disputes before the Permanent Court of Arbitration, the Geneva Convention, United Nations Resolutions etc. India, though not a signatory and thus not ratified, for the Vienna Convention on Law of Treaties, has accepted it judicially as soft law for interpretation of treaties23. In contrast hard law refers generally to legal obligations that are binding on the parties involved and which can be legally enforced before a court. In monistic jurisdictions like Belgium, treaty law automatically becomes part of municipal law, but in dualist jurisdictions like Germany or India, treaties have to be incorporated into domestic law. India exhibits a more complex situation Tax treaties that India enters into has to be ratified by the Parliament, since treaty law is not automatic municipal law in India and the same can be incorporated into the legal framework only once it is ratified, thereby exhibiting dualistic tendencies. However, section 90(2) of the Income Tax Act portrays a monist nature of the Tax law in India. According to section 90(2) , treaty law if more beneficial to the assessee is automatically given precedence over Tax Law, thereby exhibiting a superior nature of treaty law over municipal law. It is in the interest of the taxpayer, that he be allowed to choose from either the hard law or the soft law on what could be beneficial to him. However, controversies remain, and pending decisions.
- Stabilization Agreements : Referred to as Advance Pricing Agreements, provides the taxpayer with a regime of certainty with regards to taxes, particularly like that of India for a previous period and also a foreseeable five year period. These could be for any matter related to the parties ALP adjustments, Royalty agreements, FTS agreements. However, as has been witnessed in the Indian context, the program has not met with a desired degree of success, primarily owing to the reason of revenue wanting to protect its interests, rather than being forward looking and encourage investments. We shall be looking at this aspect in much more detail in part 2. However, having said, this is an important regime for the revenue to consider and would entail and instilling of confidence in investors, particularly when we are having controversies like Concentrix, Sofina SA, Sanofi, Vodafone, Deccan Holdings etc gathering the eye of the globe. Recently there has been rumors of global giants issuing guidance to their staff on what to avoid for the purpose of not having a deemed PE in India.
- Privacy of information of the taxpayer : This possibly is the most conflicting of all domains when considering the rights and protections of taxpayers. The data protection domain, taxpayer information sharing, is a conflict, that is a pandora’s box. On one hand we have we have the taxpayer who wants his data confidential which is his right, on the other had we have the revenue which wants to share information, under information sharing agreements24, to gauge on data to impose more taxes on the taxpayer. Although this is largely an unexplored domain, but automatic data exchanges have started under CRS(Common Reporting Standard) between various jurisdictions, and thus notices are being issued in escaped income and capital world over. There was a recent judgement25 by the SCOTUS on FBAR penalties in the United States, which is all about information exchange. More on this on a by jurisdiction basis.
- Audi Alteram Partem: The right of a taxpayer to be heard in a cause against him, is a primary feature of any taxing statute26, and is a must for any taxpayer in an international context. Although a breach of this on its singularity27 might not in itself be a cause for unfairness, but for protection of the taxpayer from any arbitrary unfairness it is imperative that proper notice be issued and care should be taken that considerations of the taxpayer are taken into consideration. On his part the taxpayer also needs to be aware of his rights and obligations, and needs to take steps to make necessary objections before the appropriate authority as per law in order to be a subject.