Retroactive Tax Legislation
Philip Baker QC
Grays Inn Tax Chambers
IFA Mauritius
10th May 2012
Outline of Presentation
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A note on terminology
Policy considerations
National positions
The international, human rights position
The failure to grandfather
Concluding comments
– A personal word – speaking in a personal capacity
1) A note on terminology
• NOTE: only concerned with adverse changes
• Retroactive legislation: imposing a tax burden / a
higher tax burden on income (etc.) already earned
• Retrospective legislation: imposing a tax burden /
higher tax burden on FUTURE income (etc.) from a
transaction already completed
– E.g. removal of tax-free pension receipts
• Petit retrospectivity: announcing changes during
current tax year
2) Policy considerations
• Retroactivity /retrospectivity undermine:
– Legal certainty - predictability
– Legitimate expectations (so may not be objectionable where
there is no legitimate expectation – e.g. in cases of abusive
tax avoidance)
• Retroactivity undermines rights to enjoyment of
property
• Both damage respect for the rule of law and
confidence in the reliability of the government
concerned
• Both can have a massive impact on investor confidence
3) National positions
• Complete ban on retroactive tax legislation:
– Brazil; Greece; Mexico; Mozambique; Paraguay;
Peru; Portugal; Romania; Russia; Slovenia;
Venezuela (of countries’ known positions)
• Almost total ban: Hungary; Poland; Sweden
• Most countries: permitted only in specific situations,
and with safeguards:
– To counter tax avoidance; or
– Where previous contrary expectations; and
– Where there is a strong public interest
3) National positions
• The UK:
• 1978 Hansard debate -> the “Rees Principles”
• March 2011 – Protocol on Retrospective Tax
Announcements
– Monitored by Tax Professionals Forum
• 11 instances since 1945
– To counter abuse tax avoidance schemes
– To reverse unanticipated court decisions
• Note: safeguards
3) National positions
• France:
• Constitutional limitations in principle, based
on art 16 of the 1789 Declaration of Human
Rights : in particular, retrospective legislation
should be justified by a an objective of
sufficient general interest.
3) National positions
• France:
• Constitutional Council on when it cannot do
so:
« if the legislator can modify a rule of law or validate an
administrative act or private right retroactively, it is on condition
of pursuing an objective of sufficient general interest and
respecting final judgments and the principle of non-retroactivity
of penalties and sanctions; that, moreover, the amended or
validated act must not fail to have regard to any rule or
constitutional principle, unless the general interest being pursued
is itself of constitutional value; and, finally, that the scope of the
modification or validation must be strictly defined »
3) National positions
• France:
• See: http://www.conseil-constitutionnel.fr/conseilconstitutionnel/root/bank_mm/anglais/en201078qpc.pdf
• Previously decided case are however always excluded from the scope of
the retrospective legislation if they are final : « décision passée en force de
chose jugée » which includes court rulings even if they could still be
challenged before the Conseil d’Etat or the Cour de Cassation for reasons
of law.
• The Constitutional Council ruled also once that a retrospective legislation
which only aims is to eliminate the effects of ECJ and Conseil d’Etat rulings
is by nature unconstitutional - see: http://www.conseilconstitutionnel.fr/conseil-constitutionnel/francais/les-decisions/accespar-date/decisions-depuis-1959/2005/2005-531-dc/decision-n-2005-531dc-du-29-decembre-2005.976.html )
4) International, human rights
• No absolute ban on retrospective tax
legislation
• Contrast retrospective criminal legislation:
– Art. 7 European Convention on HR (47 states)
– Art. 15 International Covenant on Civil and
Political Rights (167 states)
• Note: application to tax penalties – cases from
Bendenoun v. France (12547/86) to Jussila v. Finland
(73053/01)
4) International, human rights
• Case law of the European Court of Human
Rights:
• Article 1, First Protocol – right to enjoyment of
possessions:
– ABCD v. UK (8531/79)
– MA v Finland (27793/95)
– SB v. Finland (30289/96)
– Di Belmonte v. Italy (72638/01)
– Yukos (14902/04) – change of law
4) International, human rights
• Retroactive / retrospective tax legislation must
be
– “in accordance with the law”;
– “necessary in a democratic society”;
– serve specific purposes (e.g. economic needs);
– not impose an individual and excessive burden
(balance individual rights with society’s interests)
• Retroactive / retrospective tax legislation
which does not satisfy these requirements will
be unlawful misappropriation
5) The failure to grandfather
• Note: state practice – (UK and France) –
exclude existing, decided cases from the effect
of retroactivity
• Principles involved:
– Legal certainty; legitimate expectation PLUS
– Right to a fair trial;
– Respect for the rule of law;
– Respect for independence of the judiciary;
– Respect for the enjoyment of possessions
5) The failure to grandfather
• Aguardino SRL v. Moldova (7359/06) judgment
of the 27 September 2011
– 126,000 Euros VAT plus 101,000 fine
– June 2002 – Supreme Court upheld taxpayer
– October 2005 – Parliament adopted
“interpretative” change to the law
– November 2005 – Supreme Court asked to review
its judgment
5) The failure to grandfather
• On Art 6 (right to a fair trial)
• “[25] The right to a fair hearing before a tribunal as
guaranteed by Article 6(1) of the Convention must be
interpreted in the light of the Preamble to the Convention,
which, in its relevant part, declares the rule of law to be part
of the common heritage of the Contracting States. One of
the fundamental aspects of the rule of law is the principle of
legal certainty, which requires, among other things, that
where the courts have finally determined an issue their ruling
should not be called into question ...
5) The failure to grandfather
• On Art 6 (right to a fair trial) (cont)
[26] Legal certainty presupposes respect for the principle of
res judicata ... that is, the principle of the finality of
judgments. This principle insists that no party is entitled to
seek a review of a final and binding judgment merely for the
purpose of obtaining a rehearing and a fresh determination of
the case. Higher courts’ power of review should be exercised
to correct judicial errors and miscarriages of justice, but not to
carry out a fresh examination.”
5) The failure to grandfather
• On Art 1, First Protocol (right to enjoyment of
possessions)
[40] The Court considers that the applicant company had a
‘possession’ for the purposes of Article 1 of Protocol No.1,
namely the amount of money which it had been absolved from
paying to the Inspectorate by virtue of the Supreme Court’s
judgment of 19 June 2002. Quashing such a judgement after it
has become final and unappealable constitutes an interference
with the judgement beneficiary’s right to the peaceful
enjoyment of that possession .... Even assuming that such an
interference may be regarded as serving the public interest, the
Court finds that it was not justified, as a fair balance was not
preserved and the applicant company was required to bear an
individual and excessive burden ...”
5) The failure to grandfather
• Breaches of Art. 6 (right to a fair trial) and Art 1, First
Protocol (right to enjoyment of possessions)
• NOTE: not an isolated case
– Cases on reopening final judgments: Stere v Romania
(25632/02); Stingaciu and Tudor v. Romania (21351/03);
Blidaru v. Romania (8695/02); SC Pilot Service SA Constant
v. Romania (1477/02); Dragu v. Romania (11947/06); Ciul v
Romania (7644/04); Lefter Nita v. Romania (9410/04)
– Cases on retroactive legislation without grandfathering
EXISTING litigation: Zielinski, Pradal and Gonzalez v. France
(24846/94); Arras v. Italy (17972/07); Agrati and others v.
Italy (43549/08)
5) The failure to grandfather
• Wider implications: world-wide implications
• Right to a fair trial: Art. 14 ICCPR
• Universal Declaration of Human Rights:
– Art 10 – right to a fair trial
– Art 17 – freedom from arbitrary deprivation
• Lack of respect for the rule of law –
fundamental to all civilised societies
6) Concluding comments
• Retroactive / retrospective tax legislation
• Needs to be justified as a matter of law
• It damages legal certainty and legitimate
expectations
• It damages the reputation of the country
concerned and has a negative impact on
investors’ expectations
6) Concluding comments
• Retroactive imposition of substantial taxrelated fines
• Is a breach of human rights norms – ECHR and
ICCPR
6) Concluding comments
• Retroactive tax legislation without
grandfathering final and binding decisions is:
– A breach of human right norms: the right to a fair
trial, and the right to enjoyment of possessions /
freedom from arbitrary misappropriation
– A failure to respect the rule of law – contrary to
principles of law recognised by all civilised nations
– Undermines confidence in a nation’s judiciary and
the entire legal and political system
Retroactive Tax Legislation
Philip Baker QC
Grays Inn Tax Chambers
IFA Mauritius
10th May 2012