Global Tax Shelters, the Ethics of Interpretation, and the Need for a Pragmatic Jurisprudence

Published date01 December 2016
Date01 December 2016
Global Tax Shelters, the Ethics of
Interpretation, and the Need for a
Pragmatic Jurisprudence
Daniel T. Ostas* and Axel Hilling**
This article examines economic, ethical, and jurisprudential issues posed
by global tax shelters. During the 1990s, tax shelters in the United
States often involved esoteric legal instruments and exotic financial
arrangements designed to exploit hyperliteral interpretations of the
Internal Revenue Code (“Code”) in ways never contemplated by Con-
Today, tax shelters have gone global, typically using multiple
layers of corporations, partnerships, and trusts to shift income from
high to low tax jurisdictions.
As one scholar observes, “Tax shelters
*James G. Harlow, Jr. Chair of Business Ethics and Professor of Legal Studies, Michael F.
Price College of Business, University of Oklahoma, Norman, Oklahoma, USA.
**Associate Professor of Business Law, School of Economics and Management, Lund Uni-
versity, Lund, Sweden.
The authors thank Professor Laurie Lucas, Dr. Ed Hymson, and two anonymous reviewers
for helpful comments on an earlier draft. Appreciation also goes to the Ragnar S
Foundation for the financial support needed to complete this article. Responsibility for all
errors and omissions remains with the authors.
See generally Joseph Bankman, The New Market in Corporate Tax Shelters,83TAX NOTES
1775 (1999) (describing the typical tax shelters of the 1990s); Tanina Rostain, Sheltering
Lawyers: The Organized Tax Bar and the Tax Shelter Industry,23Y
ALE J. ON REG. 77 (2006) (dis-
cussing the role of the legal profession in creating tax shelters).
BANKING AND TAX HAVENS (2011) (discussing the rise of offshore tax shelters). See also
Reuven S. Avi-Yonah, Corporate Taxation and Corporate Social Responsibility, 11 N.Y.U. J. L. &
BUS. 1, 4–11 (2014) (using the “Caterpillar profit-shifting case” to illustrate the mechanics
of global shelters).
C2016 The Authors
American Business Law Journal V
C2016 Academy of Legal Studies in Business
American Business Law Journal
Volume 53, Issue 4, 745–785, Winter 2016
today seem bolder and more complicated. At the same time, they are
lacking in substance to such a degree that the creators of these newer
strategies must surely know they have little to litigate if their clients are
Not surprisingly, both international bodies and governments
around the world are seeking to limit overly aggressive tax shelters and
to close loopholes.
This article seeks to advance policy discussions of
global tax shelters with a particular emphasis on the need for a prag-
matic jurisprudence, or interpretive legal philosophy, with which to
invigorate traditional antitax avoidance (ATA) doctrines in the United
States and to supplement ATA initiatives worldwide.
The analysis proceeds in three parts followed by a conclusion. Part I
offers a taxpayer’s perspective. It begins with the economic allure of tax
shelters and then outlines some basic tax-avoidance strategies, including
the construction of potentially abusive step transactions and the use of
international tax havens. Part I also explores whether it is ethical to use
such strategies. The discussion of ethics draws on recent Organisation
for Economic Co-operation and Development (OECD) directives
regarding the social obligation to cooperate with taxing authorities and
considers the role of professionals who advise on such matters.
Part II shifts the focus to ATA policy. It begins with the traditional
ATA doctrines developed by U.S. courts, including “substance-over-
form” and the “business purpose” test. These doctrines invite courts to
close legal loopholes and to disallow overly aggressive tax strategies.
Part II also surveys attempts to combat abusive tax shelters in jurisdic-
tions around the world. The discussion of ATA policy, whether domestic
or international, highlights the role of legal philosophy by comparing
and contrasting a jurisprudence of positive legal formalism, which limits
the use of ATA doctrines, with a more pragmatic legal philosophy, which
encourages their use. An argument is advanced that, given the current
trends in tax avoidance, the more pragmatic jurisprudence is preferred.
Richard J. Kovach, Taxes, Loopholes and Morals Revisited: A 1963 Perspective on the Tax
HITTIER L. REV. 247, 277 (2008).
See infra Part II.B (examining antitax avoidance (ATA) efforts in several countries and
recent EU directives addressing the matter).
See infra Part II.C.2 (defining and discussing the judicial philosophy of legal pragmatism
and explaining how it might work in the tax arena).
746 Vol. 53 / American Business Law Journal
Part III illustrates the importance of judicial legal philosophy with a
case study. Part III examines a tax controversy currently working its
way through Swedish courts. The controversy involves the application
of a “true business purpose” test to intragroup loans to establish wheth-
er interest payments on such loans are deductible. Embracing the Swed-
ish tradition of positive legal formalism, taxpayer advocates seek to limit
the use of the true business purpose test, while policy-oriented propo-
nents contend that an active use of the test could help reduce interna-
tional profit-shifting.
The Swedish example was chosen because
Sweden has recently enacted broadly worded ATA legislation, the Swed-
ish courts have a strong tradition of positive legal formalism, and the
current controversy illustrates that the battle against international tax
avoidance needs the cooperation of all branches of government. More
particularly, the Swedish case underlines the need for any country—civil
law or common law—to use a pragmatically oriented legal philosophy to
advance the policy goals behind broadly worded ATA legislation.
Overly aggressive tax shelters threaten to derail economic policy in
three ways. First, to the extent that tax shelters reduce tax revenues
that the legislature had intended to collect, fiscal deficits worsen. Sec-
ond, to the extent that tax shelters are predominately used by wealthy
people and multinational enterprises, concerns of income polarization
Third, and perhaps most importantly, to the extent that
tax shelters are seen as manipulations of one’s legal obligations, general
See generally Maria Hilling, Justifications and Proportionality: An Analysis of the ECJ’s Assess-
ment of National Rules for the Prevention of Tax Avoidance,41I
NTERTAX 294 (2013) (presenting
the general arguments for and against the recent reforms both in a Swedish context and
in relation to EU law). See also infra Part III.D.
The recent “Occupy America” movement focused public awareness on distributional
OF OCCUPY WALL STREET (2012) (discussing the recent social movement); LISA A. KEISTER,
WEALTH IN AMERICA:TRENDS IN WEALTH INEQUALITY (2000) (discussing the root causes of
wealth polarization). In 1976, the top 1% of U.S. income-earners earned 8.9% of total
income; in 2007, it was 23.5% while at same time the average real hourly wage declined
by 7%. See Robert H. Frank, Income Inequality: Too Big to Ignore, N.Y. TIMES (Oct. 16, 2010), President Obama highlighted his
concerns with maldistribution in the 2015 State of the Union Address. Barack Obama,
President, Address Before a Joint Session of the Congress on the State of the Union (Jan.
20, 2015), in DAILY COMP.PRES.DOC., Jan. 2015, at 5,
2016 / Global Tax Shelters 747

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