TAX STABILITY.

• Date: 01 August 2020
• Author: Davies, Jennifer
• Published date: 01 August 2020
• Author: Davies, Jennifer

Contents I Introduction II Unilateral International Tax Measures III Treaty Interpretation A Lack of Uniformity in Treaty Construction B Foreign Case Law C Language IV Integration of Soft Law into Domestic Tax Laws V Foreign Tax Law As an Integer of Domestic Tax Laws A Ascertaining Foreign Law B Proving Foreign Law C Adducing Evidence of Foreign Law VI Tax Laws and Expert Evidence VII Concluding Remarks I INTRODUCTION

The hardest thing in the world to understand is income taxes.--Albert Einstein (1)

The theme of this piece was prompted by the reflection that the paradigm tax case for judicial determination is shifting from the tax consequences of purely domestic transactions to taxation issues associated with cross-border transactions or involving international tax measures. We think of tax law as domestic law (which, essentially, it is), but we have moved from a domestic tax framework designed around local affairs to a complex tax design, concerned with protecting Australia's tax base and guarding against the abuse of domestic tax rules in international dealings by the enactment of measures directed at bringing an appropriate share of tax revenue from international dealings within Australia's tax jurisdiction.

Nowadays, international tax law plays a much larger and more significant role in the design of our domestic tax laws than it once did. In recent years there have been many important and complex legislative changes to Australia's tax laws responding to the rise of global trade and the digital economy. With the globalisation of the economy and growth in intra-group trade, the complexity of Australia's tax laws related to international dealings has increased enormously in the effort to ensure that Australia receives its fair share of tax on cross-border transactions. The years since the 2013 Organisation for Economic Cooperation and Development's ('OECD') Action Plan on Base Erosion and Profit Shifting, (2) in particular, have seen a great deal of change with an explosion of legislation directed at international dealings and multinational companies. Key pieces of legislation in recent times have included multinational anti-avoidance legislation, (3) which came into effect on 11 December 2015, the Diverted Profits Tax, (4) which came into effect on 1 July 2017, and the hybrid mismatch rules, (5) which took effect from 1 January 2019. Also on 1 January 2019, the Multilateral Convention to Implement Capital Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting ('MLI'), (6) to which Australia became a signatory on 7 June 2017, came into force for Australia. (7) We have seen with these and other legislative measures a shift from the traditional taxation base of income and expenditure, profit and loss, to rights of taxation based on international standards, including anti-abuse measures, designed to counter and prevent base erosion and profit shifting in Australia.

In a paper titled 'Tax in a Changing World' the former Second Commissioner at the Australian Tax Office, Andrew Mills, observed that '[c]hange in tax has been the one consistent feature of the tax landscape for decades'. (8) Frequent changes in tax laws to keep pace with economic, social and commercial developments are not just to be expected; change is an integral part of the tax regime and taxation reform is necessary, but constant tax law changes have an impact on tax stability. However, it is undoubted that the complexity of the recent changes to our tax laws present a central challenge for tax stability. The changing tax environment and globalisation of tax policy also means that international tax law will take on more importance. With the rapid 'internationalisation' of Australia's tax laws, international tax practices and rules and international tax law jurisprudence will have much more significance and will have to be grappled with in the future development of the law. This piece examines some of the challenges for certainty and consistency in the development of that law in the Australian context.

II UNILATERAL INTERNATIONAL TAX MEASURES

It is a feature of business today that multinational groups have entities in more than one jurisdiction through which the group conducts its activities. Australia, like many other countries, has implemented tax reforms based upon internationally-agreed fiscal standards. It might be thought that domestic law giving effect to internationally-agreed fiscal standards, intended to produce a cohesive global approach, should mean certainty and uniformity between sovereign states in respect of the fiscal outcomes of an international dealing within a multinational group. However, that proposition assumes that the domestic tax laws of the sovereign states are in harmony, which is not a valid assumption to make. Whilst around 130 countries have collaborated through the OECD Base Erosion and Profit Shifting ('BEPS') project on international tax rules designed to protect tax bases, (9) the differing tax policies and revenue laws within each country necessarily govern the tax treatment and fiscal consequences of an international dealing in accordance with the particular domestic laws of the country concerned. Harmonisation of international rules and practices for the taxation of international dealings does not mean alignment, or consistency of, tax outcomes for an international dealing. For example, the Australian hybrid mismatch rules include an integrity rule in sub-div 832-J of the Income Tax Assessment Act 1997 (Cth) (TTAA 1997') that was not part of the OECD BEPS Action 2 recommendations. (10) In a press release in November 2017, the Treasurer explained:

Following the introduction of the hybrid mismatch rules, multinational groups investing into Australia may seek to achieve double non-taxation outcomes by using investment structures and arrangements that may not fall within the scope of the OECD's hybrid mismatch rules. For example, foreign headquartered groups investing into Australia may use financing arrangements through interposed entities in zero tax countries which reduce Australian profits without those profits being subject to foreign tax. The [g]overnment is concerned that such arrangements would undermine the integrity of the hybrid mismatch rules and will therefore be developing a targeted integrity rule to ensure such arrangements cannot be used to circumvent the hybrid mismatch rules. (11) Despite the global move towards harmonised international tax law, the fiscal outcomes in jurisdictions may differ where a country implements a unilateral international tax measure. This lack of cohesion in taxation treatment by sovereign states is an inevitable consequence of purely domestic considerations shaping tax measures. Thus although international tax law is moving to a more uniform approach, each country through its own set of tax laws defines how, and the extent to which, those international tax laws operate.

III TREATY INTERPRETATION

Lack of cohesion in treaty interpretation is another potential source of inconsistent outcomes. The MLI and Australia's bilateral tax treaties form part of Australia's domestic law by Acts of Parliament, (12) but they are international agreements and because they are international agreements, the interpretative principles applying to the construction of those treaties are not governed by the domestic principles of statutory interpretation but by arts 31-3 of the Vienna Convention on the Law of Treaties ('VCLT'). (13) Article 31(1) requires a treaty to be interpreted in 'good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose'. (14) Article 32 provides that

'[r]ecourse may be had to supplementary means of interpretation ... to confirm the meaning resulting from the application of article 31 or to determine the meaning when the interpretation according to article 31: (a) Leaves the meaning ambiguous or obscure; or (b) Leads to a result which is manifestly absurd or unreasonable. (15) Article 33(1) specifies that '[w]hen a treaty has been authenticated in two or more languages, the text is equally authoritative in each language, unless the treaty provides or the parties agree that, in the case of divergence, a particular text shall prevail'. (16) These rules codify the customary rules under international law for the interpretation of treaties, (17) so that even with respect to bilateral treaties where neither country has adopted the rules of the VCLT or, where one party has but the other party has not (for example the United States ('US') has signed the VCLT but not ratified it), (18) there should not be a considerable difference in the general approach to the construction of such international treaties.

A common interpretation of tax treaties is important for tax stability. In Bywater Investments Ltd v Federal Commissioner of Taxation, (19) which concerned the determination of corporate residency for income tax purposes, Gordon J explained as follows:

If the terms of an instrument enacted into Australian law were interpreted strictly in accordance with domestic principles of statutory interpretation, there would be a risk that the treaty would be interpreted differently even though other countries had adopted the same instrument. That risk is significant with double tax agreements. The whole point of those agreements--to prevent double taxation across two jurisdictions--would be frustrated if 'they were to be interpreted in a manner which would permit or foster conflicting outcomes between the two States in question'. (20) Where possible, the courts will interpret tax agreements to achieve consistency but tax treaty interpretation is not always cohesive, despite the applicable interpretative principles recognised by international law applying to the construction of international treaties. There is no global jurisprudence and the principle of judicial...