When, where and how to use OECD materials to interpret Swedish tax law
Following international cooperation in the area of taxation, for example within the OECD, a number of non-binding materials (soft law instruments) have been generated. These documents contain information and considerations that may be of interest for interpretation of domestic tax rules, writes Johan Rick of KPMG Sweden.
There is reason to believe that the interest in these types of documents may increase further due to the recent focus on tax issues in general and, specifically, the BEPS Project. The following is stated in the OECD discussion draft dated July 28 2016, about interest deductions:
"International tax issues have never been higher on the political agenda. The integration of national economies and markets has increased substantially in recent years, putting a strain on international tax rules which were designed more than a century ago. Weaknesses in existing rules create opportunities for base erosion and profit shifting (BEPS), requiring bold moves by policy makers to restore confidence in the system and ensure that profits are taxed where economic activities take place and value is created."
The objective of this article is to present thoughts and reflections on how to use reports from the OECD to interpret Swedish tax law, specifically following the judgment from the Supreme Administrative Court, HFD 2016 ref. 23. The main focus of this article will be on when and how the use of OECD reports is acceptable. Specifically, since tax issues are higher on the international political agenda, pressure may increase on tax authorities and courts to achieve certain political aims. In the long run this may lead to an increased tendency towards using sources in which fiscal political goals are expressed for interpretation of domestic tax rules.
The OECD reports and the Swedish source of law practice
For interpretation of Swedish domestic legislation as well as tax law, the assumed source of law practice is as follows: law, precedents, legislative history, and doctrine. This means that the primary source for interpretation is the text of the law. Second, precedents are used to determine whether the Supreme Administrative Court has issued a ruling on how a particular point is to be interpreted. In the absence of such a clarification when the legal text leaves room for interpretation, then as a third instance the legislative history of the law should be consulted. The fourth source is guidance that can be sought in various relevant literature.
Materials from the OECD do not specifically fit into any of the categories of this generally accepted model. The closest fit is perhaps to regard OECD materials as a form of doctrine when used for interpretation of Swedish domestic tax law. Nonetheless, OECD materials, at least in some regard, are treated differently to traditional doctrinal sources. There is an air of authority to materials from the OECD, which implies that such material sometimes seems to be treated more like legislative history than doctrine. Thus, the placement of OECD materials in the Swedish legal tradition is ambiguous, and the explanation for this, to a certain extent, may be that within the Swedish legal system (and within tax law in particular), the use of soft law instruments is limited. There is no natural place for such materials within the accepted hierarchy of sources of law. Therefore, it is difficult to really know where the materials 'fit in' (if they do at all) to the interpretation of Swedish domestic law.
In the following passages, on the basis of the ruling HFD 2016 ref 23, certain reasoning and thoughts with regard to the use of materials from the OECD for interpretation of Swedish domestic law are detailed.
HFD 2016 ref. 23
On the April 12 2016, the HFD announced rulings in the case numbers 4594-14 and 4595-14. The rulings became a precedent with number HFD 2016 ref. 23.
The primary issue of the rulings was if remuneration according to certain sponsorship agreements should be regarded to be such remuneration for a sporting activity in Sweden which is taxable according to the Act on special income tax for foreign resident artists (1991:591) (the artist tax law).
Henceforth, the HFD asserts that no direct guidance for the judgment of this issue can be found from the legislative history but that Kammarrätten has considered that guidance can be sought from the OECD's Model Tax Convention and its Commentary.
The HFD then states that "The Commentary on the Model Tax Convention is primarily of importance for the interpretation of tax treaties which are based on the Model Tax Convention; however, it may also be used for guidance for the application of Swedish domestic legislation (see RÅ 2009 ref. 91). This assumes that the internal legislation is based on the same principles [emphasis added] as the Model Tax Convention (se prop. 1986/87:30 s. 42)."
In their deliberation of whether the artist tax law is based on the same principles corresponding to rules in the Convention (article 17), the HFD commences by comparing the wordings of the provisions.
Furthermore, HFD notes in their deliberation that having observed obvious similarities in the wordings the Convention has been of great importance for the preparation of the artist tax law. Furthermore, it appears natural, according to HFD that the domestic legislation has been shaped in such a way that it does not derogate the right to tax which is afforded to Sweden according to the tax treaties which are based on the Convention. Consequently, HFD considers the Commentary to article 17 to be possible to use for interpretation of the artist tax law.
HFD's announcement in the case with regards to when and how the Commentary can be used for interpretation of domestic legislation should be generally applicable to the extent that they should also include the use of other types of non-binding assertions from the OECD. However, the question remains as to whether there is a limit to what types of material can be used. For example, one may consider whether materials are required to reach a certain status with the OECD in order to qualify as relevant interpretative material. Hopefully, these questions will be answered through precedence in due course.
With regards to rule of law and predictability aspects, the HFD however does make some statements in the case which should restrict the use of OECD material in some respects. The HFD notes that the Convention did not contain any statements which gave guidance for the question up for interpretation in the case. Such statements are first found in the updated Commentary which was approved in 1992 and which was based on an OECD report from 1987. The HFD states that from the legislative history to the artist tax law it is clear that this report was considered during the preparation of the law and that the Commentary regarding advertising and sponsorship, which was included, was meant to clarify how article 17 should be interpreted and not to change the meaning of the article. The HFD therefore considers the Commentary although it was approved after the emergence of the artist tax law, to be usable for the interpretation of the law.
At this point a comparison should be made with case HFD 2016 ref. 57 (Riverdance). The case considers the interpretation of tax treaties and a change to the Commentary to article 17 which has led the scope of application to be expanded (and thereby changed the meaning of the article). The change in question was considered to mean a change of the article's meaning and that this change had occurred after the signing of the treaty. Under those circumstances, according to the HFD the change should be disregarded when interpreting the common intentions of the parties to the treaty.
More or less unambiguous cases of principal agreement
From the case presented above (HFD 2016 ref. 23), it is clear that OECD materials as a general rule can be used for interpreting Swedish domestic legislation in cases where there is an agreement regarding the principles which bear the respective regulations. HFD shows in the case where such a judgment may be conducted in individual cases.
The case at hand, however, may be seen as being quite clear with regards to the admissibility of OECD materials for interpretation of domestic law. In other cases the connection may not be as clear. For example, it is possible to imagine cases where the wording may well match, but where the legislative history or precedence make it clear that the domestic law rests partially on other principles than those upon which the OECD rules are built. Furthermore, it is possible to imagine cases where the wording matches and the legislative history doesn't make any mentions of corresponding OECD regulations. In these latter cases the question may arise of whether there is a presumption that the internal regulations should be regarded as resting on the same principles as the equivalent OECD rules unless otherwise explicitly indicated. Furthermore, one may imagine cases where the wording does not match but where the legislative history more or less indicates that the domestic law rests on the same principles as equivalent OECD regulations. Here the question may arise of how far the wording of the domestic law can be stretched through interpretation with reference to OECD materials. There may also arise situations where solely the systematics of the rules suggests that the rules are to be regarded as resting on the same principles. In those cases the question arises of how much weight should be placed on this grounds for interpretation alone when wordings and legislative history don't give any direct guidance or aren't unequivocal.
Thus there may be cases where in practice it is far more difficult to ascertain whether the domestic legislation rests on the same principles as the equivalent OECD regulations.
The purpose of this article has been to put forth thoughts with regard to the use of materials from the OECD for the interpretation of Swedish domestic legislation. The HFD has stated in case 2016 ref. 23 that the Commentary can also can be used as guidance for the application of domestic law – albeit under the condition that the domestic legislation also rests on the same principles as the Convention.
The HFD's statement with regards to when and how the Commentary can be used for interpretation of domestic legislation should, as mentioned above, be considered to be generally applicable to the extent that it should also include the use of other types of non-binding statements from the OECD.
The HFD makes a few statements in the case with regards to the rule of law and predictability aspects which should be borne in mind in this context. This can be compared with the case HFD 2016 ref. 57, where closely related issues are subject to consideration.
The case which this article has considered; HFD 2016 ref. 23, may be regarded as a relatively simple case with regards to the admissibility of interpretation based on OECD material. The wording matched well and there were clear indications in the legislative history that OECD regulations had been taken into consideration in the authoring the domestic legislation. Furthermore, there were strong systematic reasons which supported a uniform interpretation of the domestic law and equivalent OECD regulations.
There may however, as noted above, be cases where the method used by HFD is not as easily applicable and as such it is far more difficult to ascertain whether the domestic legislation rests on the same principles as the equivalent OECD regulations. Therefore, it is important that the question is noted in cases where it arises, leading to a certain amount of consideration with regards to the use of OECD materials for the interpretation of Swedish domestic legislation.
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Johan Rick is head of KPMG Sweden's Tax Dispute Resolution and Controversy practice and specialises in tax litigations. He has a master of laws from Uppsala University. Johan joined KPMG in 2015 and has a background as a judge at the Administrative Court in Stockholm and as a Legal Clerk at the Administrative Court of Appeal in Stockholm with particular specialisation in tax cases. Johan has also worked a number of years as a lawyer at a large Swedish law firm. Johan is a well-recognised tax litigation expert and is representing both national and international clients in a number of tax disputes. Johan has wide sector experience including real estate, construction, oil and gas, financial services and the manufacturing industry.