When the Making of a
Tax is an Abuse of Rights
By
*M.T. Abdulrazaq
One of the interesting developments of tax jurisprudence in
the last decade is the importation of the concept of abuse of rights in setting
the limits that a tax payer may go in legally planning his tax affairs in a way
to limit his liability. The concept was explained in the English case of Barclays Mercantile Business Finance Ltd v
Mawson (2005) STC 1 that a practice was
abusive if the transactions concerned resulted in a tax advantage the grant of
which would be contrary to the purpose of legal provisions.
The more interesting development is that of the Centros Case (1999)ECR 1-1459 where the argument was advanced that the concept
may be used to protect the citizen against a State Institution or an exercise
of the Law.
In our own context in Nigeria and where the National Assembly
or the State Legislature introduces a tax, can a citizen or group of citizens
affected by such action approach the courts to nullify the tax on the grounds
that no institution of State should be allowed to be unreasonable as to desire
to the detriment of citizens, an improper imposition manifestly contrary to the
objective of the law in conferring that particular right on the National Assembly
or the State Legislature?
The starting point, is again, the Centros Case, a European Community Court Case, where the argument
was advanced that the problem of abuse is resolved in the final analysis by
defining the material content of the particular situation and thus, the scope
of the right conferred. In other words, it is claimed that to determine whether
or not a right is actually being exercised in an abusive manner is simply to
define the material scope of the right in question.
Three issues come to attention in this matter.
The first, is to remember and keep in mind the judgement in Nicole v Ames (1899) 173 US 509 at 515
that “the power to tax is the one great
power upon which the whole national fabric is based.It is not only the power to
destroy,but it is also the power to keep alive ”.
The second, is to determine whether what the National or
State Assembly seeks to impose is a tax. The celebrated definition of a tax is
that enunciated in the case of Matthews
v Chicory
Marketing Board (1938) 60 CLR 263 at 279 where it was held that
“a tax is a compulsory exaction of money
by a public authority for public purposes,enforceable by law,and is not a
payment for services rendered”. This definition was based on the definition
enunciated by the Privy Council in Lower
Mainland Dairy Products Sales Adjustment Committee v Crystal Dairy Ltd (1933)
AC 168 at 175.
It follows therefore that fees for services rendered, the
charge for the acquisition or use of property, penalties and arbitrary
exactions are not tax.
The third issue, flowing from the second, is that taxation
cannot be arbitrary, it must be capable of objective reference. Again, it is to
the Centros Case we return, in this
case, as guidance to the material scope of the right in question.
Therefore, if a right exists to impose a tax, then for the
exercise of the right not to constitute an abuse of rights, a tax must in its
material scope be imposed as a tax.
The only question, thus, to be answered is whether the
imposition sought to be exacted by the National or State Assembly is a tax in
its material scope?
The defining limits and guidance of the material scope of tax
is provided by Frans Vanistendael and Victor Thuronyi in their work on the Legal Framework forTaxation and
published in Tax Law Design and Drafting, Volume 1, by the International Monetary Fund
in 1996.
In general, the basic legal framework calls for taxation
according to the rule of law. The fundamentals of this framework are that a tax
can be levied only if a statute lawfully enacted so provides, a tax must be
applied impartially, and revenue raised by a tax can be used only for lawful
public purposes. The rule of law contemplates that these principles will be
enforced by independent courts.
Vanistendael and Thuronyi further state that in addition to
these very general principles, the power to make tax laws is subject to several
types of legal limitations which include constitutional or other basic legal
principles underlying an organized society, international agreements,
interpretation of the laws by the courts, the general framework of public law
and political structure of the country as a centralized or a federal State.
In addition, to avoid the abuse of rights label, the National
or State Assembly must maintain the principles of equality, the principle of
fair play or public trust,the principle of proportionality and ability to pay ,the
principle of non-retroactivity, constitutional limitations, tax payers rights
and international agreements.
Three abuse of rights examples provided will suffice for the
present discussion.
In Belgium, the principle of equality was held to prohibit
taxing companies providing professional services at the maximum rate. In Belgisch Staatsblad, No 89/94, it was
held that the circumstance that a company was engaging in professional services
was irrelevant as a criterion to determine the tax rate applicable under the corporate
income tax.
Third, the Constitutional Court of Guatemala in Leyes
y Reglamentos de la Tributaria 83,91-92, read a provision of
the income tax law as taxing an item of income twice and struck it down as
violating a constitutional prohibition against double taxation.
Our legislators must respect the principle of legality on the
basis of the prescription of “no taxation
without representation” that was introduced in the Magna Carta in 1215. They must continually obtain our consent and
act as a democratic guarantee against arbitrary taxation by the government. They
must have imprinted on their mind the words of James Otis that “taxation without representation is tyranny”.
The government at all times must remind itself of the words
of Jean Baptiste Colbert, Minister of Finance under King Louis XIV of France
(1619-1683) that ”the art of taxation
consists in so plucking the goose as to get the most feathers with the least
hissing” and learn from Mahabharata
of Ancient India, that ”the ruler should
act like a bee which collects honey without causing pain to the plant”.
With exploding deficits, a sluggish economy and a raging
debate on how to improve our current financial situation, the nagging question
for our democracy is “where exactly are
we to draw the bounds around the legislature’s right to tax the citizens”?
Abuse of rights is a civil law concept which can be
traced back to Roman times as fraud on the law and its introduction into our
democracy will be one of the greatest challenges to the Nigerian Judiciary in
the coming years.
*Professor M.T.
Abdulrazaq is Professor of Taxation and Partner, Tax, Regulatory and People
Services at Saffron Professional Services – tabdulrazaq@saffron-ng.com
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