Interpreting tax legislation on the basis of the principle of legality.

This month – at the LSE Taxation Seminars and at the Boston University Law School’s Graduate Tax Program Lecture Series – Deakin Law School academic, Dr Amir Pichhadze, discussed and explained the need to interpret tax legislation on the basis of the principle of legality.

As he pointed out, in Chevron Australia Holdings Pty Ltd v Commissioner of Taxation the Federal Court of Australia recently interpreted Australia’s transfer pricing legislation as requiring the application of a commercial rationality test, as recommended by the OECD’s Transfer Pricing Guidelines.

In his analysis, he suggests that, in its interpretation of Australia’s transfer pricing legislation as authorizing and requiring such a test, the Federal Court should have considered and applied the interpretative principle of legality. According to this principle of statutory interpretation, a legislature is presumed not to have abrogated existing fundamental rights, freedoms and/or legal principles, unless it has done so explicitly and clearly. As he recently explained in an article published in the New Zealand Journal of Taxation Law and Policy, reconstruction and nonrecognition powers risk abrogating freedom of contract rights and/or principles. Hence, applying this principle to the interpretation of Australia’s transfer pricing legislation, the Federal Court should have presumed that Parliament did not intend to abrogate from freedom of contract rights and/or principles based on a commercial rationality test, unless it did so clearly and explicitly.

He points out that the Australian legislation, in its current formulation, does not clearly and explicitly authorize the reconstruction and/or nonrecognition of controlled cross-border transactions based on a standard of commercial rationality. Hence, the court should have left it to the legislature to more clearly and explicitly convey its legislative intentions, as is currently exemplified by the approach of the New Zealand government which has expressed its intention to redraft its transfer pricing legislation by, among other things, explicitly authorizing the reconstruction and/or nonrecognition of controlled cross-border transactions based on the standard of commercial rationality.

In forthcoming conferences, Pichhadze will be further discussing these lessons (about the interpretation and drafting of transfer pricing legislation), as distilled from the experiences in Australia and New Zealand. He will also be discussing the application of these lessons to the (re)interpretation and (re)drafting of transfer pricing legislations in other jurisdictions. This includes, among others, forthcoming presentations at:

• The 6th Annual Conference of the Tax Administration Research Center (UK);
• The IBFD’s 16th edition of the Postdoctoral International Tax Forum (Netherlands); 
• The Institute for Austrian and International Tax Law at the Vienna University of Economics and Business, as Senior Visiting Research Fellow (Austria); and,
• The Max Planck Institute for Tax Law and Public Finance, as visiting scholar (Germany)