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 inan 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.
Second, the principle that tax liability should be based on the taxpayer’s ability to pay is accepted in most countries as one of the bases of a socially just tax system. The principle of ability to pay is, for example, opposed to head or poll taxes, against which the British revolted
in 1990 under the Thatcher government.
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, Faculty of Law, Lagos State University, Provost, CITN Tax Academy and Tax Partner at Nolands Nigeria Professional Services
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