THE FIGHT AGAINST ABUSE OF RIGHTS AND DOUBLE NON-TAXATION AFTER “MOLINOS DEL RIO”

Dr. Esperanza Buitrago Diaz1

Summary:
In this paper, the author examines the implications of the prohibition of abuse of rights in application of the 1985 Double Taxation Convention (DTC) between Argentina and Chile following the 2021 judgment of the Argentine Supreme Court in the case Molinos Río de la Plata S.A. v Argentinian Revenue Service [2021]. The Supreme Court denied the treaty benefits, among other, by interpreting the purpose of avoiding double taxation as excluding possibilities of double non-taxation when indications of an abuse of rights exist. The research explores the influence of legal culture on the Supreme Court's decision and dives into the prohibition of abuse of rights as unwritten principle of international law applicable to DTCs in conditions similar to the ones set by that discipline. In this way, the work present four standards to explore when determining whether it is reasonable to conclude that either the unwritten principle prohibiting the abuse of rights or the codified PPT applies.

Keywords:
Double non taxation, Tax avoidance, Abuse of tax law, Prohibition of abuse of rights

1. Introduction

The allegorical concept of tilting at windmills, famously depicted in Spanish literature through Don Quixote's imaginative battles, resonates with the intricacies encountered in the endeavor to curb tax avoidance. Just as Don Quixote meticulously prepared for his arduous quests by listing his armor and by instructing Sancho (a peasant he has persuaded to assist him in his battles) to saddle Rocinante for his battles, the OECD has been compiling various instruments for the complex battlefield against tax abuse and “avoidance”. In 2015, it expanded the measures already available in soft and hard law, anticipating that the newly added title, preamble, guiding principles and the introduction of a principal purpose test (PPT) would act as a guiding force against opportunities for non-taxation or reduced taxation through tax evasion or avoidance resulting from the application of double tax conventions. To achieve a similar result, the Supreme Court of Argentina denied the benefits stemming from the 1985 Double Taxation Convention (DTC) between Argentina and Chile to a taxpayer who would have otherwise achieved double non-taxation. In this 2021 landmark verdict in the case 'Molinos Río de la Plata S.A.' versus the Argentinian Revenue Service2, the Argentinian Supreme Court held that instances of double non-taxation fall beyond the treaty's purview, precluding the entitlement to treaty benefits.

While we navigate the labyrinth of avoidance through double non-taxation, I could not resist the temptation to present some ideas in this book to invite exploring how the Argentinian Supreme Court’s case might fare in the land of tulips, cheese, windmills, more than 100 tax treaties and of Hans Arts! I hope that our esteemed colleague does not decide to levy a 'pun'alty for this cross-border taxation detour in his honor! Hence, given that double non-taxation is the main subject of this work, I feel compelled to clarify that the topic choice does not follow any strategy suggested by Hans in his lectures and teaching at Maastricht University but merely relates to our common interest in Latin America. Additionally, the topic adheres to my evil intention to provoke his response to the controversial decision of the Argentinian Supreme Court from the perspective of current Dutch tax treaty law.

Hans, a gentleman and dedicated scholar, has passionately devoted his life to Maastricht University, showcasing immense expertise across various realms including a vivid interest in the ethical practice of taxation and the intricate and challenging borderline issues posed to practice in the last decade. His academic journey serves as a shining example of how a fulfilling and successful life in academia can extend in different roles. His multifaceted contributions, encompassing scholarship, mentorship, and advocacy, display the profound impact academics in different positions can have on society. This Liber Amicorum is a celebration not just of his professional achievements, but also of a life dedicated to positive change. It is also my opportunity to confess: my encounter with him at Maastricht University remains a cherished opportunity for which I am profoundly grateful given his invaluable guidance and advice, both academically and in navigating significant aspects of life.

The journey through the Argentinian Supreme Court’s verdict unfolds in remarkable stages similar to the adventures of Don Quixote. Section 2 sets the scene presenting the facts of the case, allowing us to envisage how the use of a tax planning instrument can influence the application or denial of tax treaty benefits when such use is pitted against the prohibition on abuse of rights. Section 3 takes us to the battlefield, the arguments of the Court decision, where, in pursuit of justice, the Tribunal fights against the unfair erosion of the Argentine tax base. A review of various arguments shows the resemblance to Don Quixote's encounters with windmills and giants inciting me to find out their nature. In Section 4 I embark on the search for the giants, exploring how international tax law evolves by hurling some spears at the windmills and giants, seeking to distinguish the real from the imaginary in the realm of international taxation. After my analysis in section 4, the conclusion strives to sow seeds of thought, inviting the reader to reap their own reflections from the narrative.

2. Somewhere in la Mancha, in a place whose name I do not care to remember…

2.1 Somewhere in…

Decided in the land of the tango, the case involved a number of South American jurisdictions from which dividends were paid to the Argentinian parent company “Molinos del Río” (hereinafter Molinos Argentina). Flowing from a Peruvian company (Molinos del Perú SA) and three Uruguayan companies (Alimentos del Plata SA, Molinos Overseas SA and Molinos Uruguay SA), Argentina taxed the dividends paid to the Argentinian headquarters until 2003. Such taxation followed its domestic law.3 No tax treaty existed between Argentina and Peru or Uruguay. In December 2003, Molinos Argentina set up Molinos Chile, integrating the capital stock of the latter through the transfer of the majority shareholdings of the Peruvian and Uruguayan companies. As of that moment, Argentina’s taxing rights were called into question due to the allocation rules agreed in the 1985 DTC between Argentina and Chile. That treaty reads: "dividends and shares in the profits of enterprises, including returns or surpluses of cooperatives, shall be taxable only in the Contracting State where the enterprise distributing them is domiciled".4

2.2 La Mancha

Castilla La Mancha serves as the backdrop for Quixote's legendary battles against windmills. Inscribed within the very name of La Mancha lies another meaning beyond its Spanish geographical and regional connotation: A blot or a stain. This term, laden with the weight of blemish and fault, signifies the unsightly mark that tarnishes the visage or reputation of someone or something.5 Within this narrative, the stain or blot serves as a poignant emblem, encapsulating the abuse of rights as a deplorable conduct exhibited by the taxpayer. Abuse, also in the meaning of an abuse of laws, is a transgression that not only leads to the Supreme Court's refusal to extend the treaty's benefits to the taxpayer, but also draws attention to Argentina's termination of the Argentina-Chile DTC, noting a breach of the founding principles considered during the negotiation of the DTC in 1985.

“La mancha” hinges around the facts and motives that lead the taxpayer to declare in his income tax return the dividends distributed by Molinos Chile as non-taxable income in Argentina. In the taxpayer’s opinion, the income was taxable in Chile, as the place of incorporation of the intermediate holding company distributing the dividends originally paid by the Uruguayan and Peruvian companies. The weight of blemish and apparent abuse lies on the following: on one side, that the incorporation in Chile followed the Chilean holding company regime enacted in 2002 to attract “Investment Platform Companies” to the land of the multifaceted and famous Pablo Neruda. On the other, that this regime allowed Chile to tax domestic income while exempting foreign income from Chilean income tax with incorporation being the only nexus requirement.6 Since the 1985 DTC Argentina-Chile allocated the taxing rights on dividends only to the Contracting State where the enterprise distributing them is domiciled, the taxpayer reached the best of both worlds, leaving Argentina empty-handed.

As far as the Argentinian Supreme Court is concerned, Chile's decision to enact the law for investment platform companies is out of scope of the discussion in Argentina. It is a sovereign decision that the Supreme Court cannot discuss.7 The blot, la mancha, lies somewhere else. What is at issue is, in the Supreme Court’s view: “the attitude that Argentine may adopt in the face of a taxpayer's decision to avail itself, in a specific case, of this foreign legislation in order to circumvent the purposes of the bilateral treaty in force and to avoid its tax obligations”.8 As to the Court: i) The only purpose of a DTC is to avoid double taxation. Double non-taxation is not supported by tax treaties; ii) even international private law supports both conclusions. In the Court’s view there are two reasons for such an approach: a) To the extent that Article 11 DTC resolves an international case by referring back to the national law of a given country through the identification of a connecting factor, it operates as a rule of renvoi or conflict, specific to that discipline and; b) within the logic of international private law, the rule of renvoi or conflict contains limits that repel the application of foreign law in exceptional cases: in this case, international public order and, above all, fraud against the law”.9

2.3 A place whose name I do not care to remember

Though the case's roots in the birthplace of tango might seem inconsequential, within the realm of international law, it holds profound relevance. This particular case serves as an excellent illustration of legal culture's significance in Argentina, nestled amidst the revered realms of gastronomy, football and tango. Two main factors lead to this approach. On one side, the role of the Supreme Court in the interpretation of treaties matters; on the other side, the Court’s understanding of the legal framework in which the tax treaty needs to be interpreted and the implications emerging therein. The Supreme Court makes it very clear that since tax treaties signed by Argentina are governed by international law, including the Vienna Convention on the Law of Treaties (VCLT), and by the Argentinian Constitution, the principles of public law recognized in the Constitution also play a prominent role in its application. As to the Supreme Court, international treaties in force in Argentina cannot be invoked in an abusive manner, regardless of the existence of an anti-abuse clause written in the text of the treaty being applied. Besides, an alleged need of an anti-abuse provision in the DTC to counter abuse of such instrument neither responds to the understanding of international law as a subsystem within the Argentine legal system, nor finds valid support in international law.10

3. The Supreme Court views: the windmills and the giant adventure

As Don Quixote and Sancho travelled, they came across the windmills. Despite Sancho's warning that they were facing windmills and not giants, Don Quixote fearlessly attacked them. He threw a spear at one, but a strong wind moved the spiral of the windmill and the spear broke into pieces sweeping Don Quixote and Rocinante away. Recalling his warning, Sancho heard Don Quixote claiming that it was Frestón, an evil sorcerer, who had turned the giants into windmills to rob him of the glory of his victory!

In the current scenario of the combat against abuse, the windmills adventure is tempting. The Argentinian Supreme Court used a good number of arguments opening a battlefield for debate in the realm of DTCs. The journey through the arguments of the Argentinian Court in the application of anti-abuse measures - codified or not -, shows how legal culture and the approach to international treaties can influence the decision. The denial of the Molinos’ request to grant the treaty benefits of article 11 and allocate the taxing rights on the dividends to Chile will be explicated in the following subsections.

3.1 Tax Treaties form part of a legal system subject to the principles enshrined by the Constitution

In Argentina, international treaties do not constitute an autonomous body of law. They form part of the legal system - as a plurality of rules of different nature, rank and authorship -, all subject to the Constitution. Therefore, when a conflict arises in their application, a confrontation between the international treaty and domestic law is not possible, but compliance with the Constitutional principles of public law is required.11 The interpreter must presume the need to seek coherence in the normative order and in weighing the applicable legal principles and the consequences of the decision for constitutionally protected values cannot be ignored.12 Even though the DTCs are international treaties, their interpretation must be in accordance with the principles of public law laid down in the Constitution. This obligation also binds the Federal Government, which is obliged to consolidate its relations of peace and trade with foreign powers by means of treaties that are in conformity with these principles, as stipulated by article 27 of the Constitution.13

3.2 Non-absolute rights: Anti-abuse clauses unnecessary

While taxpayers could claim treaty benefits, the Supreme Court grapples with the challenge of addressing potential abuses of these provisions by taxpayers. The Court resolves such dilemmas by scrutinizing the application of the treaty and denying the benefits, elaborating on the good faith and the prohibition of abuse of rights as principles acknowledged in different regulations in Argentina. As to the Court, “article 11 of the Treaty is clear, but the taxpayer’s interpretation gives it a meaning that is contrary to the principles that prohibit the abuse of rights and oblige to an interpretation in good faith. Such principles are clearly in force in the Argentine Civil Code (Articles 9 and 10)”.14

In addition to the above, the Supreme Court underscores the non-absolute character of rights and the reasonableness of their regulation as a principle of public law enshrined in the Constitution (Articles 14, 28, 99-2 and concordant). This principle not only allows the possibility of reasonable regulation of rights but also serves as a safeguard against their abusive exercise. The Court firmly asserts that, “no international treaty in force in Argentina can be invoked in an abusive manner, irrespective of whether an anti-abuse clause is explicitly included in the treaty text”.15 In its view, neither the Argentine legal system nor international law, including the VCLT, necessitates a written anti-abuse provision to repeal or nullify the abuse of rights.

In addition to the above, the Supreme Court states that treaties, including tax treaties, are limited by their own text and their interpretation is guided by the principle of good faith. This is acknowledged by articles 26, 27 and 31 VCLT, establishing that: "every treaty in force is binding on the parties to it and must be performed by them in good faith" (Article 26), the prohibition to invoke domestic law as justification for the non-performance of a treaty (Article 27), and the need for interpretation "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" (Article 31, paragraph 1). Alternatively, it allows recourse to supplementary means if the interpretation given in accordance with Article 31 "leaves the meaning ambiguous or obscure or leads to a manifestly absurd or unreasonable result" (Article 31, paragraph 2).

3.3. Good faith principle, anti-abuse clauses unnecessary in domestic and treaty law; Reasonableness as standard for application

In accordance with the Argentine Constitution, international law recognizes the principle of good faith as a structural guideline for the interpretation of international treaties. Together with this, the Supreme Court states that "reasonableness" is the standard of conduct that precludes interpretations that distort the nature, object or purpose of the treaty under the pretext of relying on its provisions. Tax treaties must be interpreted according to the hermeneutical rules of international law and tax law, having regard in particular to Articles 31 and 32 of the VCLT (approved by domestic law). They enshrine the principle of good faith in accordance with the ordinary criterion to be attributed to the terms of the treaty in the context of the treaty and taking into account its object and purpose.16

From the Court's point of view, the conclusion is that a good faith reading of the 1985 DTC does not allow for elusive interpretations that would lead to a distortion of the matrix that supports it: the avoidance of double taxation. The 2012 DTC between Argentina and Chile only clarifies this and is consistent with the objectives of the treaty and the principles of domestic public law, rejecting the possibility of a contradictory view. Rather than a conflicting interpretation - and contrary to the dissenting arguments of the Supreme Court’s President Rosenkrantz -, the Court claims that the 2012 DTC describes: “the logical express manifestation of a criterion that: i) already prevailed in international tax law in various DTCs; ii) had been recognized by the Chilean authorities as the binding standard of analysis in the face of this international problem; iii) had been expressed by the competent internal body of the Argentine tax administration”.17 As to the Supreme Court, this conclusion is also supported by the arguments set out below from point 3.5 onwards.

3.4. Unilateral changes to the dynamics existing during the negotiation of the treaty that led to double non-taxation fall out of the scope of tax treaties

The Supreme Court emphasizes that the avoidance of double taxation is a purpose of the DTC, but also of each individual DTC provision. Specifically, Article 11 is elucidated as follows: "(to prevent double taxation), dividends and shares in the profits of enterprises, including the profits or surpluses of cooperatives, shall be taxable only by the Contracting Party in which the enterprise distributing them is resident".18 Notably, the recent modification in Chilean domestic law, exempting foreign income of investment platform companies, introduces the potential for double non-taxation. This is because dividends originated in the Uruguayan and Peruvian companies did not pay income tax in Chile under the investment platforms regime given that they were profits coming from companies outside Chile. The investment platforms regime assured taxation on income from Chilean sources, excluding income from other countries.

As to the Supreme Court, in a good-faith interpretation, the material validity of the DTC is insufficient to sanction the pursuit of such dual non-taxation.19 Consequently, the Supreme Court finds the taxpayer's application of the 1985 DTC, aiming to circumvent income tax on the dividends in question, as “unreasonable”. Given that the envisaged scenario of double taxation, which the DTC seeks to address, has not occurred, the Supreme Court considers that accepting the taxpayer's interpretation would lead to an application of the DTC contrary to the principles and values enshrined in the Argentine Constitution.20

3.5. Domestic anti-abuse measures confirm the conclusion reached

The Supreme Court considers the application of the economic reality principle to treaty situations justified under certain conditions.21 Argentina codified the principle by Law 11.683 of 1998 in article 2, and the Argentine tax administration upholds its application in the absence of an anti-abuse measure in a DTC since 2010.22 In the Supreme Court’s view, the memorandum of understanding of the new DTC with Chile makes this clearer by stating that the DTC does not prevent the application of domestic anti-abuse clauses.23

For the highest tribunal, the principle of economic reality balances the taxpayer’s right to limit his taxes to the minimum legally due with tax strategies designed to shift profits.24 The principle makes it possible to unravel the reality of evident tax strategies to disguise profit remittances under the form of other income and in this way to obtain more advantageous tax treatments. The possibility to disregard the forms and structures assigned by taxpayers to their acts or businesses and to reclassify them to consider the real economic situation is, however, limited. As to the Supreme Court, this power can be validly exercised by the tax administration only if there is a manifest inconsistency between the economic substance of the transaction or business and the form or structure that the taxpayers have given it. In the absence of such a manifest inconsistency, “priority must be given to the legal structures used by private individuals”.25

3.6. The OECD approach to the beneficial ownership clause confirms the conclusive findings

As to the Supreme Court, the beneficial ownership clause included in many Argentinian DTCs also supports the conclusions reached. Furthermore, the Court considered that the OECD Commentaries clarify its application, thus serving as supplementary means of interpretation according to article 32 VCLT.26 The tax authority explained in a circular letter the recommendation given by the OECD to apply the beneficial ownership clause and anti-abuse provisions to conduit companies. Hence, it considers appropriate such Commentaries to deal with conduit companies created after the release of the Chilean holding company regime. In the Supreme Court’s view, the memorandum of understanding of the new DTC with Chile makes it clear that "the benefits of the Convention shall not be conferred on a person who is not the beneficial owner of the income from the other Contracting State or of the assets situated there [...]".27

3.7 The PPT clause of the new DTC with Chile confirms the conclusion reached

Decided in 2021, the Supreme Court looks back to 2012 when Argentina terminated the DTC with Chile, pointing how this end followed unfavorable aspects to the interests of the national treasury and the solution brought by the new 2015 DTC. The latter - and current - DTC includes a Memorandum of Understanding confirming that: "the benefits of a double taxation treaty should not be granted where one of the main purposes of carrying out certain transactions or operations is to secure a more favorable tax position and, achieving such more favorable tax treatment in such circumstances is contrary to the object and purpose of the provisions in question".28

3.8 Private international law leads to a similar conclusion

As far as the Supreme Court is concerned, from the perspective of international private law the result is the same. On the one hand, Article 11 DTC operates as a rule of renvoi, referring an international case back to the national law of a given country by identifying a connecting factor and, on the other, conflict rules in private international law are subject to limits too. In the Molinos case, those limits are international public policy and fraus legis.

3.9 Reasonableness: A principle in public –constitutional law and international law, including the VCLT

The Supreme Court refers to reasonableness several times. As already indicated, it considers that: i) Rights are not absolute, reasonableness is the standard for their regulation29; ii) "In Argentine law, reasonableness stands as a fundamental principle in both public and constitutional domains. Consequently, regulations must adhere to this principle, and abusive usage finds no protection30; iii) Good faith serves as the primary guideline for interpreting international treaties under Article 31, paragraph 1 VCLT. However, in cases where the interpretation according to Article 31 VCLT results in ambiguity, obscurity, or leads to manifestly absurd or unreasonable outcomes, supplementary means of interpretation may be employed. In coherence with international law, the Argentinian Constitution upholds 'reasonableness' as the standard of conduct, precluding interpretations that distort the nature, object or purpose of treaties under the pretext of relying on their provisions. This standard underscores the necessity for applying DTCs in good faith.31

While reasonableness is required for an application in good faith of the DTC, the Supreme Court also considers that the conclusions reached by the Court of Appeals were also reasonable and well grounded. The Supreme Court then referred to aspects not refuted by the taxpayer in the extraordinary appeal that support its conclusions:

Molinos Chile was incorporated one year after the publication of the Chilean legislation on investment platforms (holdings), which affected the dynamics of the DTC;
Molinos Chile immediately remitted to Argentina the income generated by the Uruguayan and Peruvian companies. Hence, the income did not remain in the assets of the Chilean holding and therefore it was not used to fulfill its corporate purpose;
Argentina had not signed DTCs with Uruguay and Peru, the countries where the income came from;
Even though Molinos Chile involved other companies domiciled in different countries (Chile, Italy, Spain, Switzerland and the United States), the main income came from one of the Uruguayan companies (Molinos Overseas SA). Furthermore, there was no substantial income coming from Chile.

4. “I am Don Quixote, and my profession is that of a knight-errant. My laws are to undo wrong, to do good and to avoid evil…

… I flee from the easy life, from ambition and hypocrisy, and I seek for my own glory the narrowest and most difficult path. Is that foolish and fatuous?” Coming from Miguel de Cervantes Saavedra, the quote is no understatement. Instead, it may resonate with Cervantes' experiences, possibly reflecting his personal challenges badly known with his late recognition as one of history's greatest writers. Even in his role as a tax collector, he confronted adversity. But while we wonder if and how we can undo the wrongs in the wicked battle against tax avoidance, with an already in place challenging soft and hard international tax law scenario, it seems best to try a couple of spears to see if I find any giants:

4.1 “Somewhere in” and the relevance of legal culture

The location (or somewhere in…) is not unimportant. Legal culture matters. The Argentine Supreme Court brings important grounds in this regard: Tax Treaties form part of a legal system wherein the Constitutional values need to be considered and the Court does not hesitate to do so. As the decision in the Molinos case shows, the Argentine Supreme Court uses the powers vested on her as maximum tribunal in Constitutional matters, being the final interpreter of the Constitution and guardian of the rights and warranties enshrined by it. As to the Court, the reference to the Constitution in application of international treaties is not new in Argentina.32

I believe that the approach of the Argentine Supreme Court would be unthinkable in the Netherlands: Not only does the absence of a Constitutional Court pose a challenge. As outlined in Article 120 of the Dutch Constitution, courts lack the authority to challenge parliamentary acts based on potential contraventions of the Constitution. The constitutional review is trusted to the bodies involved in enacting the legislation, i.e., the Council of State and the legislator – i.e., both houses of the Parliament. The Council of State plays a role as an advisory body to the Government and both chambers of Parliament (i.e., the Senate and the House of Representatives). While its advice may lead to the removal of legislation (as it happened with three bills recently approved), the Council of State does not play the role of a Constitutional Court either. One of its sections serves as one of the four highest courts of appeal in administrative matters, however.

The binding effect of Dutch treaties only takes place after the Parliament approves and publishes them (article 93 of the Constitution). In addition, Article 94 provides that: “Legal provisions which are in force within the Kingdom shall not be implemented, where such implementation would conflict with any treaty provision or any resolution of an international organization that is binding on all persons”. Dutch Courts are prohibited from assessing the compatibility of Dutch legislation with the Constitution; however, they are obligated to evaluate whether statutory regulations align with international treaties.33

While the Dutch approach may be unimaginable to an Argentinean, the consideration of constitutional values in the application of international treaties may seem peculiar to a Dutchman. Differences in constitutional values may pose significant challenges to the interpretation of an international treaty and may ultimately lead to the inapplicability of rules such as Articles 27 and 46 VCLT. Such rules prevent a State from invoking provisions of its domestic law as a justification for its failure to fulfil a treaty, except in the case of manifest violations relating to the competence to conclude treaties. At the same time, the idea of applying the domestic legal provision granting precedence to the constitution over international law seems questionable. According to the ILC Study Group on the Fragmentation of International Law, "there is no general order of precedence among international legal norms".34 In a fragmented order, as it is international tax law, the question is whether this is equally applicable.

Beyond legal culture differences, the Argentine Supreme Court's decision underscores one of the major challenges of international tax law: instead of resolution by international tribunals, domestic courts often handle conflicts regarding the application and interpretation of tax treaties. Many domestic courts adjudicating international tax disputes lack specialization in tax matters and may have limited exposure to international law. In the Molinos case, the Argentine Supreme Court compared DTCs and private international law and concluded that both lead to similar consequences. For an international tax lawyer, such a statement may seem unacceptable. As it is acknowledged in the literature on international taxation35, rather than choosing for a legal regime applicable, DTCs allocate the taxing rights according to the rules agreed in the treaty.

Whilst the comparison between DTCs and private international law is not ideal, the Argentinian Court raises an intriguing argument: private international law, including tax treaties, encounters a boundary in international public policy and fraus legis. I align with this notion, believing that the prohibition of abuse, as a principle inherent to legal science, may stem not merely from legal culture or subdivided fields of law, but from the very essence of law itself as a means to advance civilization rather than solely serve leviathan or purely laissez-faire, mercantilist approaches. In other words, as a consequence of a social rule of law. This signifies a shift towards a more socially oriented perspective on law as a tool serving society, particularly evident as the limitations of the French Revolution's principles became apparent. While in civil law the notion of rights encounters boundaries in the prohibition of abuse already hundred years ago, it has not found full echo in tax law yet.

Still, international taxation is in its infancy. Expressions such as 'Argentinian international tax law', 'US international tax law', or 'Dutch tax law' underscore the limited scope of international law. With no universal approach to taxing cross-border transactions and lacking a universally accepted authority to enforce tax treaties, the development of international taxation resembles the external public tax law of individual countries.36 This was an early stage of international law that opened the way for a more international approach. As Koskenniemi observes, early notions of external state law and external public law ultimately proved inadequate for addressing the complexities of an international society, failing as predecessors of modern international law.37 The Argentinian approach, mirroring many others in international taxation, bears striking resemblance to these early views of international law. At this developmental stage, international organizations such as the OECD and the UN have assumed a pivotal role in shaping international tax law. In the Molinos case, the Argentine Supreme Court notably referenced the OECD Commentaries as a supplementary means of interpretation, bolstering its primary argument (as discussed in section 3.2).

4.2 Prioritizing the intention over the text of tax treaties through different indicators not expressed in the DTC text; A case for the unwritten beneficial owner clause?

Since the 1985 DTC allocated the income based on the source principle, it posed a dilemma regarding its application to dividends, as such clause explicitly allocated income to the country of residence of the distributing enterprise. In this way, a normative conflict in the application of the 1985 DTC emerged, creating an imbalance between the rights of the taxpayer and its tax obligations. The Argentine Supreme Court was unable to resolve this conflict solely through the interpretation of Article 11 on dividends. The Court then referred to a number of indicators that supported its primary argument in the application of the principle of the prohibition of abuse of rights as decisive, when instead of avoiding double taxation the application of a treaty leads to the opposite object and purpose: double non-taxation.

While reinforcing its primary argument, the Supreme Court took an unexpected turn by referencing the OECD Commentaries on the beneficial owner provision of the new 2017 DTC to clarify the purpose of the 1985 DTC regarding the questioned payments. Although presented as an additional argument, this is not insignificant. The 1985 DTC notably lacks a beneficial owner provision. As it is known in the tax world, the beneficial owner clause is not a principle of international tax law. In this way, the argument put forward by the Supreme Court looks more like a giant on Quixote’s way. For Dutch scholars this may be an unexpected and unacceptable twist of the 1985 treaty text.

The use of the Beneficial Owner clause from the OECD Commentaries as a means to clarify a treaty, as a supplementary means of interpretation, while the actual 1985 DTC lacks such clause, is controversial. The Supreme Court cited the Commentaries on the beneficial owner of dividends, a requirement incorporated in the OECD MTC (as discussed in section 3.6) but absent in the 1985 Argentina-Chile DTC governing the case. Is it possible to take the facts and circumstances pointing to a recipient different to the beneficial owner as an indicator of abuse?

The establishment of an abuse of rights poses a dilemma: If the treaty lacks a Beneficial Owner requirement, is the judge allowed to rely on the underlying rationale of such a clause to conclude the existence of an abuse of rights? On one hand, this challenges the primacy of the text of the treaty, while, on the other hand, it raises questions about the methods available to establish the existence of abuse when the treaty's text is insufficient for both Specific Anti-Abuse Rules (SAARs) and General Anti-abuse Rules (GAARs). The VCLT advocates for an interpretation based on treaty text, in the context and considering the object and purpose of the treaty provisions. However, if the examination of facts and circumstances incontrovertibly demonstrates the existence of abuse, the judge is not bound for the treaty provisions regardless of the absence of a SAAR such as the Beneficial Owner clause or a GAAR. This is what Osterloh-Konrad calls the mismatch between the (literal) meaning of substantive tax law provisions and their purpose.38

The above aligns with the treaty's object and purpose rejected by the Court: Double non-taxation resulting from abuse of rights is not supported by the treaty. While such a conclusion may be unexpected for a tax lawyer, it may not be surprising for an international lawyer. In fact, the evolution of the beneficial owner clause shows that tax courts have found ways to combat abuses in the “hard” text of tax treaties. As I explain in section 4.5, before the beneficial owner clause was codified in tax treaties, a US Court denied treaty benefits based on the interpretation of the terms "received by”, and over time the judicial approaches opened the way for its recognition in soft law and in DTCs. In the Molinos case, the Court did not explore other provisions that could have led to the denial of treaty benefits (see 4.5). Instead, it underscored the influence of domestic and international legal principles on DTCs.

Whether SAARs are the best way to ensure certainty in tax matters is debatable. If the codification of a SAAR has an abuse of rights as a premise and aims to ensure its application, would a judge refrain from declaring demonstrated abuse in cases where the SAAR is absent? The prohibition to abuse may help defining conditions under which the meaning of statutory law may be set aside if the result of a rule-abiding legal analysis does not match the purpose of the relevant statutory provision, as Osterloh-Konrad indicates in regard to the function of a GAAR.39 As to the Argentinian Supreme Court in the decision of the Molinos case, this possibility is limited and can only be validly exercised by the tax administration if there is a manifest inconsistency between the economic substance of the transaction or business and the form or structure that the taxpayers have given it.

4.3 Non absolute rights and the prohibition of abuse as a principle of international law and of domestic law of civilized nations

In the Molinos case, Argentina's Supreme Court asserts the harmonized application of domestic and international legal principles to combat abuse of rights, extending it to cases in international tax law. Principles such as the prohibition of abuse of rights and consequent interpretation in good faith (Articles 9 and 10 of the Civil Code)40, as well as pacta sunt servanda and hermeneutical rules of the VCLT, guide the Court's conclusion that an anti-abuse clause is unnecessary to address abuse41 (reference is made to sections 3.1 to 3.7 above). For a tax lawyer, the application of civil law principles and abuse of rights to tax cases may look like facing a formidable giant in Smurf’s and Quixote’s land. However, does international law lead to a different conclusion? This question is significant, as the Court maintains that neither the Argentinian legal system nor international law, including the VCLT, requires a written anti-abuse provision to address or nullify abuse of rights, although it also supports its decision in the domestic anti-abuse tax provision (see 3.5 above).

As to the Supreme Court, the principles of good faith and the utilization of supplementary means in treaty interpretation serve to mitigate the risk of yielding absurd or unreasonable outcomes. Nonetheless, the application of legal principles ending in the denial of treaty benefits has few friends in international tax law, and very few court cases in the field of international tax assert it. In my view, this is not surprising. Tax specialists have little exposure to international law and unwritten principles of international law may lead to uncertainty in tax matters. A review of the literature on the subject shows, however, that the acknowledgment of the prohibition of abuse of rights as a general principle of law recognized by civilized nations opened the door to its recognition as an independent, not codified principle of international law. This recognizes limits to the exercise of rights. As to scholars, the principle has proved to be a very useful one, also in contemporary law.42

Although the prohibition of abuse of rights traces its origins to Roman law, notably encapsulated in the maxim "use your rights so as not to injure others" (sic utere iure tuo ut alterum non laedas), its legal evolution underwent a significant transformation. This shift was evidently influenced by Enlightenment principles regarding individual rights and the role of the rule of law. In this process, both codification efforts and judicial decisions have contributed to its recognition, akin to a battle reminiscent of Quijote's spears to undo wrong, do good and avoid evil.

The debate whether the prohibition to abuse rights was a general principle of law recognized by civilized nations was considered by the Committee of Jurists preparing the draft Statute of the Permanent Court of International Justice. These discussions took place around 1920. Research by legal scholars of the time showed that: “Most of the authors came to the conclusion that in civil law countries and socialist countries the abuse of rights and the abuse of power were prohibited. As far as common law countries are concerned, it was submitted that, although a decision in a given case may be based upon principles of the law of torts, when a court looks into the motives of an actor the legal theory applicable is indistinguishable from that of abuse of rights”, as explained by Kiss.43 For some scholars the fundament of the principle in common law relies on the concept of equity.44

The literature on abuse of rights from around 1920 reveals striking similarities between controversies faced in civil law during that period and those encountered in international tax law today. The Molinos case serves as a pertinent example, prompting questions about whether international tax law lags the application of principles of international law and legal principles of civilized nations. In the 1920s, the influence of the French Revolution and liberalism permeated the understanding of rights exercise. Classical individualist liberalism and laissez-faire economic theory underwent significant re-evaluation, as legal scholars engaged in vigorous debates on reconciling individual rights with their societal implications within the context of unrestricted individual rights paradigm established post-French Revolution.

According to Bólgar, renowned legal scholars such as Planiol and Rippert claimed no abuse existed in French law if rights were exercised within the limits of the law that granted them. Therefore, judicial scrutiny of such (legal) actions would be arbitrary and based on elements of a moral and not legal nature. Against these views, Louis Josserand presented his theory on the relativity of rights, equated with their socially equitable exercise. He claimed that any exercise of rights contrary to the social functions of these rights constitutes abuse. “Consequently, abuse of rights may only arise in connection with damages caused through the exercise of these particular rights; in the examination of damages caused by other means the question of the abuse of rights does not concern the Courts”.45

The controversies surrounding abuse of rights in France led to a profound transformation in legal and democratic ideals, marked by a shift towards the social functions of individual rights. This social approach raised concerns in France and Germany, particularly regarding the intersection between positive law and morals.46 Scholars note that the shift originated in France and was partially adopted by Germany and Switzerland47, with subsequent codification efforts in other countries such as Czechoslovakia and the USSR.48 While many other nations followed suit, the content of the prohibition against abuse of rights varies among jurisdictions."49

Once it became evident that civilized nations acknowledged the principle of the prohibition of abuse of rights, its evolution in international law continued, recognizing that the rights of each actor are inherently limited by the rights and interests of others. This principle has found expression in treaties, court cases, the lexicon of international organizations, discussions by the International Law Commission, scholarly discourse, and various fragmented areas of international law. While the principle has not been codified, Beyers identifies several functions it serves, including balancing rights and obligations, resolving tensions between ambiguously defined rights (normative conflicts), extending legal controls to previously unregulated areas, and filling new gaps as they arise.50 Furthermore, Kiss' analysis of extensive treaties and case law demonstrates that the principle has not only gained recognition in international law as a whole but also in its fragmented fields.51

The principle prohibiting the abuse of rights has evolved into a stand-alone principle of international law52, rather than an interstitial rule.53 This inherent nature remains unaffected by its use alongside or as a complement to other principles of international law, such as the principle of good faith, or its incorporation into customary international law.54 As emphasized by Brownlie, the principle should not serve as a substitute for other criteria, such as good faith, reasonableness, or normal administration, where these are already clearly established as part of existing rules.55

The recognition of the prohibition of abuse as an independent principle in international law provides interpreters with an additional tool to address demonstrated instances of abuse of rights, particularly in the absence of an anti-abuse provision. However, this recognition does not have direct effect; mandatory requirements still apply. Scholars reflecting on the evolution of the clause indicate that the examination of facts and circumstances, the intent of the parties, and the burden of proof lie with the party alleging abuse.56 Therefore, abuse of rights cannot be presumed.57 If these conditions apply in the typical horizontal relationship of civil law, I see no reason why it should be different in tax law in which the relationship is not horizontal due to the fact that the taxpayer is not on equal foot with the tax administration as a power of the state. Hence, an inversion of the burden of proof, as suggested by the OECD with the Principal Purpose Test clause, appears unacceptable from the perspective of international law. According to scholars, such inversion is disproportionate under EU law.58

In the Molinos case, the Argentine Supreme Court held that an anti-abuse provision is not required to address abuse in the application of tax treaties. This conclusion is grounded on two main reasons: firstly, the application of codified principles found in Articles 26, 27 and 31 VCLT, such as good faith and reasonableness; and secondly, the prohibition of abuse as a principle of domestic law with applicability in the case at hand. Notably, the Supreme Court did not acknowledge the prohibition of abuse of rights as an independent principle of international law. Clearly, the lack of codification presents certain disadvantages. Still, the Court was clearly faced with a dilemma: a decision that confronted the application of the treaty text with the breach of autonomous principles of international law: the good faith, the violation of the object and purpose of the text, including an interpretation preventing manifestly absurd or unreasonable outcomes and, the prohibition of abuse of rights.

Although the above arguments seem indisputable from an international law perspective, the Supreme Court entered into Quixote-like battles and dilemmas in the application to the facts in the Molinos case. For the Court, an examination of different indicators against facts and circumstances of the case, not contested by the taxpayer, was sufficient to deny treaty benefits. As explained in section 3.7 above, the Court took into account the following facts and circumstances: i) the time lapse between the incorporation of the holding company and the transfer (immediate remittance); ii) the amounts transferred; iii) the origin of the main income stream, stating that, rather than from its various companies in third countries, the holding’s income came mainly from Uruguay; iv) whether the holding company generated any income in Chile; and, v) whether the holding kept any of such income for the development of its corporate purpose. In this difficult scenario for holding companies, it is unclear whether the aspects taken from the extraordinary appeal, “not contested by the taxpayer”, were proven by the tax administration. As already indicated, in international law the burden of proof in cases of abuse of rights lies with the party alleging it. From a taxpayers’ rights perspective, this should be seen as part of the due process. For the remainder, such facts and circumstances were contrasted with indicators of abuse stated in the OECD commentaries to the beneficial owner clause and the need to counter the use of shell companies. The Supreme Court even referred to the new DTC between Argentina and Chile including a PPT clause.

4.4 Is the PPT needed?

The Argentine Supreme Court affirmed that the unbalanced situation of the 1985 Argentina-Chile DTC was corrected by the new DTC, which in fact includes a PPT provision. In 1985, a comparable provision was missing. This raises the question whether a PPT clause, as a general anti-abuse clause in a DTC, is necessary for a judge to deny treaty benefits.

The debates in civil law of a century ago bear striking similarities to ongoing discussions in international tax law. The 1935 Westminster Court case, affirming every individual's right to arrange their affairs without being obligated to pay increased taxes, underscores the principle of tax planning freedom. However, as time has passed, courts have increasingly grappled with cases where the distinction between legitimate tax planning and abuse became blurred, or where actions, while within the literal interpretation of the law, appeared artificial or contradicted its underlying spirit. Furthermore, the scope of tax planning freedom has been curtailed by DTCs and MTCs, notably with the introduction of SAARs in 1977. These rules, including clauses like the beneficial ownership clause in the OECD MTC, aim to address abusive tax practices and ensure fair taxation. Apart from SAARs, the OECD proposes a GAAR in a double track: codification (hard law) and soft law.

As it is well known, the 2017 OECD MTC proposes the inclusion of the Principal Purpose Test (PPT) in Article 29-9, alongside the recommendation to adhere to the Multilateral Instrument (MLI) for facilitating its application to treaties within scope. These proposals align with the choices available to members of the Inclusive Framework in response to BEPS Action 6. Specifically, countries have the option to adopt the PPT alone or to integrate it with a simplified Limitation on Benefits (LOB) provision. Alternatively, they may choose to forego the PPT in favor of a comprehensive LOB clause, provided they include a supplementary mechanism to address conduit arrangements. Such mechanisms may take the form of a tailored treaty PPT for conduit arrangements, domestic anti-abuse regulations, or judicial doctrines with analogous outcomes.

For the past two decades, soft law has played a significant role in shaping international tax practices to counteract abuse. Since 2003, the Commentaries to the OECD MTC have advised revenue services and judges to apply the so-called 'Guiding Principle' in the absence of anti-abuse provisions in DTCs. This principle dictates that the benefits of a DTC should not be accessible if a main purpose of certain transactions or arrangements was to secure a more favorable tax position, especially if obtaining such treatment would contravene the object and purpose of the relevant provisions. The OECD Commentaries assert that this principle operates independently of the requirements outlined in Article 29, paragraph 9 OECD MTC, which merely formalize it. In fact, the Commentaries on the OECD MTC indicate that the Commentary to Article 1, specifically Paragraphs 54 to 80, mirrors the content of Article 29, paragraph 9 OECD MTC.

The current OECD dual track approach of hard and soft law measures mentioned above is a response to the challenges encountered in combatting treaty shopping and other forms of abuse by tax administrations. The absence of a GAAR in DTCs, protocols or related instruments sparked numerous controversies regarding the authority of tax administration and even courts to address and repeal abuse. Overtime, the pre-2003 OECD reluctance to apply domestic anti-abuse rules to DTCs was defeated. As from 2003, the OECD Commentaries recommend not only the Guiding Principle, but also the application of a domestic GAAR, domestic SAARs, and judicial doctrines that are part of domestic law.

With the array of tools mentioned above, the OECD is far better equipped than Quixote in his fight against windmills. Yet, to the best of my knowledge, nowhere does the OECD mention the non-codified principle of international law prohibiting the abuse of rights as a ground or as another tool enhancing the arsenal proposed. Still, the OECD refers to a Guiding Principle in its Commentaries (the soft law track). Is it possible that the OECD is suggesting that such recommendation entails the principle of international law on the prohibition of abuse of rights? The consequence would be that the codification of the rule only plays the role of signaling function. Lang has claimed such role for the Principal Purpose Test.59 In the Netherlands, Van Weeghel questions why we would even need a PPT.60

In tax literature, an acknowledgement of the prohibition of abuse of rights as a principle governing DTCs seems alien to international taxation. Even in Lang’s view, the signaling function of article 29-9 of the OECD MTC merely emphasizes the necessity for an interpretation based on object and purpose in those cases in which one of the principal purposes of a transaction was to obtain a benefit.61 The principle of object and purpose is, in fact, another codified principle of international law, distinct from the prohibition of abuse of rights. Since international law principles lack a hierarchical order, one could conclude that, from an international law perspective, various principles could enable the repeal of abuse. Such an interpretation would stem from the "object and purpose" codified principle of interpretation in international law as well as from the prohibition of abuse of rights as a non-codified principle.

The Molinos case marks a departure from the traditional approach to the object and purpose doctrine, as the Argentine Supreme Court denies treaty benefits due to abuse of rights. It asserts that the treaty's intended purpose is to prevent double taxation, rather than facilitate double non-taxation. The dissenting vote to the judgement and the response from esteemed Argentine legal scholars indicate that this approach is not without challenges. As Teijeiro observes, in practice it might be troublesome to define with precision whether the treaty rules and/or domestic rules have been circumvented.62 Contrary to the idea that a broad tax treaty object and purpose helps little in the interpretation of a treaty under article 31, paragraph 1 VCLT63, the Supreme Court identifies within the overarching goal of preventing double taxation a constraint that excludes double non-taxation. This solution goes beyond the limited impact of object and purpose of specific provisions that may not help to counteract abuses, as in the case of the dividends provision of the 1985 Argentina-Chile DTC.

The challenges in recognizing and interpreting legal principles in international tax cases to address abuse may stem from the fragmentation of international law. This fragmentation is compounded by the limited understanding of international law among tax specialists. Consequently, the OECD's shift towards acknowledging reliance on domestic anti-abuse provisions could be a response to both the fragmentation and the challenges faced by judges in applying such principles effectively. Furthermore, vague terminology such as "avoidance" contributes to uncertainty and makes it difficult to identify abusive practices, as avoidance does not necessarily imply abuse. However, despite these challenges, current limitations in international tax planning signify a departure from the liberal approach to tax planning as a not restricted freedom towards a more socially oriented approach, where abuse is not tolerated. In this context, a GAAR may serve to prevent abuse more effectively than a SAAR, but they also pose the risk of creating uncertainty if rigorous standards for their recognition are not upheld, for instance if an inversion of the burden of proof were accepted or no resource to a judge exists.

In this context, it is unsurprising that the Argentine Supreme Court relied on so many grounds to support its decision, as evidenced by the points mentioned above in sections 3.5, 3.7, and 3.8. Since domestic courts, rather than international tribunals, decide on the application of DTCs, nuances of international law prove elusive. Additionally, this prompts a higher influence of legal culture than expected from an international law perspective. If countries were less reluctant to either create an international tribunal in this field or simply to submit cases dealing with cross-border tax issues to international courts, the development of international tax law could transcend external public tax law, becoming more harmonious and less reliant on soft law. If the latter were an option, international tribunals should have tax experts as well for balanced decisions.

According to Lowe, the prohibition of abuse of rights principle is likely to achieve much greater prominence as a check upon exercises of legal power by states.64 His view relates to international law in general. So far, I believe that an evolution towards such prominence of a principle-based approach to the abuse of rights already started in international and regional tax matters. In addition to the Molinos case, a couple of judicial decisions issued in recent years exemplify this point. For instance, the 2019 Danish cases decided by the Court of Justice of the European Union (CJEU) also serve as examples. As the CJEU stated in these cases, the general EU anti-abuse principle dictates that an EU Member State must withhold the benefits granted by EU Directives if an arrangement constitutes an abuse of rights, regardless of whether any specific anti-avoidance legislation has been implemented in its domestic law.65 While one can argue that the Danish cases deal with EU law, both the CJEU and the Argentine Supreme Court are claiming the nature of the measure, a principle, justifies its decision.

From a domestic law perspective, the prohibition of abuse of rights finds its grounds in civil law principles. In Europe, countries like France and Germany have long traditions in recognizing this principle. In taxation, however, its acknowledgement has been more limited and is maybe confronted with the imbalances created by, on the one hand, the right of the taxpayer to organize its affairs in an efficient manner and, on the other, a set of measures to counteract abuse including domestic provisions and judicial doctrines. The direction that courts dealing with international tax law might take remains uncertain, but undoubtedly, recognizing the prohibition of abuse of rights as a principle of international tax law would signify a paradigm shift into uncharted territory for tax experts. Only time will reveal whether, as Quixote suggested, changing the world – the paradigm - is neither utopia nor madness.

4.5 The text of the 1985 DTC between Argentina and Chile

While time reveals the extent of the international law principle of abuse of law in international tax law cases, I wonder if the Supreme Court’s journey through principles less familiar to taxation and the use of numerous primary and secondary arguments from all kinds of laws was truly necessary. For this purpose, a review of the DTC applicable to the case is required. It concerns a treaty between two developing countries, Argentina and Chile. Chile was a foundational member of the Andean Pact, a predecessor of the current Andean Community (and hopefully a predecessor of a Latin American Community). Together with Bolivia, Chile, Colombia, Ecuador and Peru, Chile entered into a regional agreement in 1969, followed by Venezuela in 1976.

Although Chile is no longer an Andean Pact member since 1973, the 1985 Argentina-Chile DTC follows the principles of the Andean Pact MTC, not the OECD MTC or the UN MTC. In this way, the DTC grants priority to the source rules allocating income to the country of its producing source (article 4). However, the 1985 treaty allocates dividend income to the country where the enterprise distributing them has its domicile (article 11). The dividends provision includes neither a beneficial owner provision nor terms that could help to elaborate on an object and purpose helpful to counteract abuse. The provision does not make a reference to terms such as “received by” which the US Court interpreted in the judgement of the 1971 Aiken case66 to require economic ownership and control over the income flowing through an entity not deriving financial benefit. Instead, it clearly allocates the income to the country of residence of the enterprise distributing the dividends. Such shortage does not plea in favour of the usefulness of a purposive interpretation of the dividends provision. In fact, the Supreme Court did not find room in its terms to deny the benefits.

In addition to the above, the 1985 DTC does not include a provision on treaty entitlement as the OECD MTC does. However, it states that: ”An enterprise is deemed domiciled in the country of its incorporation if this criterion applies. If this rule is not applicable or proves insufficient to attribute domicile to a single Contracting State, the company will be considered domiciled where its effective management is located, or failing that, where the primary center of its activity is situated. When, despite the rules of this section, it is not possible to determine the domicile, the competent authorities of the Contracting States will resolve the case by mutual agreement”67. The latter played an important role in the 1985 DTC urging authorities to solve by mutual agreement any doubt or difficulty in its application and, to control cases of fraud and evasion, facilitating the consultation and exchange of necessary information for that purpose (article 22). The Court decision does not make reference to the use of these possibilities in the Molinos case.

The provisions on domicile mentioned above opened the possibility to challenge both the application of the DTC and the sufficiency of incorporation to attribute domicile to a single contracting state. If the examination of the facts and circumstances and the evidence point to a potential abuse, a careful review of the facts, circumstances and evidence in the framework of a purposive interpretation is required. As Dziurdz claims, there is a need to establish a connection between the general object and purpose of the treaty with the specific goals of a treaty provision, allowing deviations from the traditional meaning of concepts, such as “residence” and “beneficial owner”, by putting more weight on the object and purpose of the relevant tax treaty provisions.68

4.6. Reasonableness: on the edge of weak OECD standards for legal certainty

The deviation of the treaty terms is allowed only in exceptional circumstances. In the Molinos case, the Supreme Court holds that the tax administration can validly exercise this power only if there is a manifest inconsistency between the economic substance of the transaction or business and the form or structure that the taxpayers have given it. In the absence of such a manifest inconsistency, “priority must be given to the legal structures used by private individuals”.69 The PPT facilitates such deviation as long as its conditions are met. In international tax law an application of the unwritten principle of international law prohibiting abuse is rare. The Argentinian Supreme Court relied on it, based on its domestic law.

Reasonableness is required in the application of the PPT and the principle prohibiting abuse. In the first, the PPT would be a consequence of positive law. According to the PPT clause such provision only applies “if it is reasonable to conclude…”. In the second case, the Argentine Supreme Court brought an important argument forward: “rights are not absolute, reasonableness is the standard for their regulation”.70 For the Court there is no doubt that this also applies to DTCs.

Reasonableness is a term used in article 29, paragraph 9 of the OECD MTC as well as in the PPT clause of the Multilateral Instrument (MLI). The OECD MTC neither defines it, nor refers to it in the Commentaries on the Guiding Principle. Non-defined terms are subject to the hermeneutical rules of DTCs. According to language dictionaries, the term “reasonable” appeals to acting or thinking in a sensible or fair manner.71 Certainly, these characteristics must be taken into account whenever there is a deviation from the written provisions of an international agreement, or from national law.

Instead of a definition of reasonableness, the MTC gives a number of examples in which the OECD considers reasonable to conclude that the treaty benefits can be granted or not. In addition to this, the OECD Commentaries link a reasonable interpretation with the burden of proof required. There are two main features important to highlight in regard to this approach: First, the standard of reasoning, since the main purpose of obtaining treaty benefits should not be lightly assumed. 72 Second, a standard of application, since the OECD states that it is not necessary to find conclusive proof of the intent of a person concerned with an arrangement or transaction and, as a matter of fact, recommends inverting the burden of proof.73 In my view, the standard of reasoning is related to the analysis of objective analysis based on facts and circumstances while the standard of application to the burden of proof and who carries it.74

The characteristics of the OECD's approach mentioned above not only call into question the sensitivity and fairness that anyone would expect from a reasonable application of a provision that allows for the disapplication of a statutory provision. It is not clear why the standard of application does not live up to the standard of reasonableness. If the purpose is not to be lightly assumed, the logical consequence would be compelling evidence of a purpose that abuses rights. Considering the benefit granted by a tax provision per se is not an abuse, even if it is one of the main purposes. As the UK upper tribunal stated in the most recent PPT case, a taxpayer may rely upon the availability of a treaty benefit and, it is common ground that HMRC has the burden of proof in the application of the DTC anti-abuse rule (article 12, paragraph 5).75

Courts have rejected the inversion of the burden of proof in other cases. In Alta Energy, for instance, the Supreme Court of Canada confirmed that Canadian courts may not use the domestic GAAR to rewrite tax statutes or DTCs to prevent alleged treaty shopping where the treaty itself clearly does not do so.76 The situation is different when the analysis of the purpose involves the application of provisions in which the burden of proof falls on the taxpayer, as the Administrative Court of Portugal indicated in the identification of a PPT involving the deduction of expenses and losses. In these cases, the law imposes the burden of proof on the taxpayer.77 The later was not the case in the Molinos case since the Court applied the doctrine of the prohibition of abuse of rights from constitutional law in connection to the good faith and purpose in the VCLT. In this way, the Argentine Supreme Court added one challenge to the many questions surrounding the application of anti-abuse measures:

The Argentine Supreme Court denied the treaty benefits arguing that the treaty purpose is to prevent double taxation, excluding in this way instances of double non-taxation. This is an appealing argument. While it is related to the treaty purpose, at the same time it ends recognizing a single principle that –I am convinced-, does not exist in DTC yet. The 1985 Argentine-Chile DTC indicates that the purpose is to prevent double taxation but it did not have a clause stating consequences for double non-taxation. Enforcing single taxation in this way is far from being non-controversial.78 This is a case where both the land of giants and windmills looks like a quagmire. No doubt, careful consideration is required in view of the necessary application and balance with other principles, as for instance legal certainty, the due process and the burden of proof related to it. If the basis for the denial of treaty benefits is abuse of law ending in double non-taxation, a full compliance of such principles is reasonable. A rule that does not met the criterion of legal certainty cannot be proportionate to the objectives pursued, the European Court of Justice stated. Legal certainty requires legal rules to be clear and precise and their consequences foreseeable, in particular where they may have adverse consequences for private individuals and companies.79 In my view this holds true for decisions applying legal provisions in any law field either at the domestic, international or supranational levels. The lack of compliance to this principle only opens the way for arbitrary decisions, which per se is not reasonable and is, in fact, far from desirable in tax matters. To prevent this, the concomitant and balanced application of various legal principles is required in the application of DTCs, as it is also in international law. DTCs should not be an exception. From this perspective, the inversion of the burden of proof suggested by the OECD commentaries is far from reasonable.

The second aspect of “reasonableness” announced at the beginning of this section regards to the Argentine Supreme Court’s claim: “rights are not absolute, reasonableness is the standard for their regulation”. The limited nature of rights also holds true to any field of law. To consider the evolution of the principle prohibiting abuse in civil law a couple of centuries ago might be useful. History makes us aware of changes of paradigm from the Roman law approach to use rights so as not to injure others to the laissez faire from the liberalism towards a more social approach. We could explore how the evolution relates to taxation and international tax law in regard to the right to structure business in tax planning and its limits. Acknowledging equal standards of application of the principle against the abuse of rights seems consequential for a reasonable decision. But, in this case the standards of application indicated above in section 4.3 should also apply in international tax matters: exceptional character, applicable if there is full proof, no inversion of the burden of proof and application concomitant with other principles -such as the due process-, and criteria, such as good faith, reasonableness or normal administration.

The arguments used by the Court and explained above in section 3.9, however, leave some doubts from the perspective of reasonableness as a recognition of non-absolute rights under the sun. For instance, one should question whether it is immaterial that Molinos Chile, as an intermediary holding, makes only an insignificant taxable profit in view of the holding claimed purpose. The judgment does not refer to an assessment of the assets and personnel used or the risks held by Molinos Chile. Nevertheless, it indicates that there was a lack of real economic link between the Chilean company, the Uruguayan companies and the Peruvian society, since the income did not remain in the assets of the holding company nor were they destined to fulfill its corporate purpose. They were rather issued to its majority shareholder in Argentina. Furthermore, the Court observed that there was no substantial income derived from Chile. It also considered the different timing involved. The judgment does not mention other criteria relevant for the establishment of the existence of the beneficial owner such as the existence of a formal or written obligation to pass on the income received, and the existence of any right to dispose of the income. Instead, the Court refers to the facts and circumstances that leave the holding, apparently, empty handed. As to the Court, the income did not remain in the assets of the Chilean holding and therefore it was not used to fulfill its corporate purpose. Is this just a fact or the proof of a lack of any right or power to dispose of the income?

Conclusion: Is it Freston's fault?

During his visit to the windmills, Don Quixote blamed Frestón for having turned the giants he had fought on his first outing into windmills. However, Frestón, the supposed evil wizard and Quixote's greatest enemy, is actually a fictional character. Quixote's niece fabricated it to dissuade Quixote from his fantasies. She invented a story alleging that Frestón destroyed all of Don Quixote's novels, when in reality she burned them to prevent Quixote’s further adventures. My journey to La Mancha is neither Quixote’s, nor Freston’s fault. This is Hans Arts’ fault! In this adventure to pay tribute to him, I realized that legal culture may have unexpected influence in the decision of international tax law cases. In reality, however, the prohibition of abuse of rights is an unwritten principle of international law backing an identical principle of constitutional and domestic law. Such a principle can help to narrow the ample meaning of avoidance and may yield more consequences in the international tax field than one could imagine. The stain (“la mancha”) in the fight against avoidance is clear when the evidence demonstrates that the taxpayer abused its rights and double non-taxation is the consequence.

The prohibition of abuse of rights makes it necessary to distinguish and fight the apparent from the real, bringing the interpreter in a confrontation of the literal application of the text backing or facilitating abuse with the object and purpose of a provision. The text of the 1985 Argentina-Chile DTC had several avenues leading to the denial of the treaty benefits that the Argentine Supreme Court unfortunately did not explore. The resource to domestic anti-abuse tax clauses and other legal provisions could be unnecessary from that perspective. Recognizing, however, that tax planning has its limits in the prohibition to abuse of rights is of fundamental nature. As an autonomous principle of international law, this unwritten principle holds paramount importance, distinct from but complementary to the written principles of good faith and of the object and purpose mentioned in the VCLT. Its recognition as such underscores its significance in shaping international legal norms and guiding the interpretation and application of treaties. Hence, it represents a powerful instrument in the battle against abuse whenever an anti-abuse provision is missing. In this task, Quixote would not hesitate entering in the quicksand of law and morals to fight for fairness. Establishing the conditions under which the principle should be applied is therefore necessary.

The reference to several indicators of potential abuse and of legal instruments that could be used to counteract it, brought us to Quixote’s world of giants and windmills. Equating DTCs with International Private Law treaties and applying an inexistent beneficial ownership clause can be examples of the first. At the same time, looking at those as reference to potential indicators of abuse, something condemned by the legal system, is a consequence of the hermeneutical dilemma: object and purpose versus text of the legal – treaty - provisions. From this standpoint and in light of the development of the prohibition of abuse principle in international law, I assert that setting aside the text of a provision necessitates intervention of a competent authority empowered by law to adjudicate on claims of taxpayer abusing its rights. Furthermore, the criteria developed to test reasonableness in the application of a prohibition of abuse of rights as an unwritten principle of international law, or of the PPT as a codified anti-abuse provision, needs to consider at least four standards: For the PPT, the standard of reasoning and the standard of application. The former requires an objective analysis based on facts and circumstances while the latter demands compliance to the due process in the application to the burden of proof and who carries it. A careful analysis of the facts and circumstances and of the evidence submitted by the one claiming the prohibition of abuse of rights would be necessary to prevent abuse of laws in the uneven relationship between the taxpayer and the state. Without these clear conditions for setting aside the legal provision at stake, the taxpayer will be lost in the world of giants.

In the acknowledged limited nature of rights, tax specialists need to acknowledge a turn towards a social approach in international tax law. The standards in this case relate: First, to the acknowledgement of at least similar criteria of evolution in civil law: the exceptional character in the application of the principle, only in the presence of full proof provided by the one claiming the abuse (no inversion of the burden of proof), with concomitant application of other legal principles -such as the due process-, and criteria, such as good faith, reasonableness, or normal administration. Second, to the need to balance various legal principles while prioritizing legal certainty and preventing arbitrary decisions. Arbitrariness in tax matters immerses taxpayers in dangerous quicksand both for them, but also for their countries.