Italy Seeks to Define ‘Abuse’ in Tax Anti-Avoidance Rules

A growing number of developed countries are looking for ways to beef up their anti-avoidance rules. According to a recent note in Tax Notes International (April 23, 2012), the Italian government proposes to introduce a general definition of abuse of law as part of its legislative anti-avoidance regime. Of interest in this regard is the proposal to define abusive behaviour as “the intentional distorted use of legal instruments to achieve tax savings”, even if that behavior doesn’t conflict with a specific tax provision. It is not apparent from the TNI note whether the government will include a definition of “distorted use” in the new legislation, or will rely instead on a non-stated premise that it will know distorted use when it sees it.

Under the Canadian GAAR, the related concept is that of “avoidance transaction,” although the concept of abuse (undefined) is introduced in subsection 245(4). For us, the definition of avoidance transaction is linked to a primary, non-tax purpose test. To date, this aspect of the GAAR has not usually been the focus of attention in the decided GAAR cases, although I suspect from cases in the pipeline of which I am aware that this may change relatively soon. In any event, it will be instructive to see whether the Italian government attempts a more rigorous definition of abuse of law and how the new test is dealt with by the Italian courts however it turns out to be worded.

The Italian government also proposes to put the burden of proving the non-abusive nature of any challenged tax planning on the taxpayer. Although the recent judgment of our Supreme Court in Copthorne may prove to have reduced somewhat the Crown’s burden to establish the statutory basis for a GAAR assessment in this country, it seems clear that the onus is still with the Crown, as I believe it should be. As presently worded, the TCP of many provisions of our Act is just not obvious. It’s appropriate that the Crown, not the taxpayer, has the burden to establish what the provisions are intended to accomplish. They obviously think differently in Italy, and I’ll watch this aspect of their new rules with particular interest.