Ⅰ. Introduction

　　Ⅱ. The basic interpretation rules

　　 1. United Kingdom

　　 2. China

　　Ⅲ. United Kingdom Judicial responses

　　 1.Duke of Westminster: tax avoidance approved

　　 2. Ramsay: The tide turns

　　 3. Evolution of the Ramsay doctrine

　　Ⅳ. What China can learn from UK’s experiences?

　　 1.A general anti-avoidance rule

　　 2.Specific anti-avoidance rules

　　 3. Legislative purpose

　　Ⅴ. Conclusion

　　Ⅰ. Introduction

　　“When one activity is taxed more highly than others there is a ceteris paribus argument that people will switch to the lightly taxed (or untaxed) activity”. [1] Owing to the nature of human being, nobody likes to pay more taxes, so tax planning industry is broadly welcomed by taxpayers. Tax planning normally involves a deliberate arrangement of the taxpayer’s financial affairs to take advantage of the fiscal opportunities presented by relieving provisions and/or loopholes in tax legislation. [2] In modern welfare state, tax rates are always high, the tax avoidance and planning industries thrive through their ability to present the taxpayer (for an appropriate fee) with “off the peg” tax planning schemes.

　　In the past ten years there has been a significant increase in tax avoidance and planning activities, the hostility of the revenue authority referred to above has demonstrated itself in two ways: Firstly, the introduction of anti-avoidance legislation to counter these artificial schemes. A number of people think that in the not long future, widely drawn anti-avoidance legislation of a general nature will be introduced, the effect of which will be to set aside arrangement where the principal motive and benefit is the avoidance of tax. [3] Secondly, more attention to the interpretation of existing tax law, preventing the loopholes.

　　This essay focuses on the intersection of tax statutory interpretation and anti-avoidance. After a comparative research between UK tax law practice and Chinese tax law practice, as a Chinese author, I hope Chinese tax law can benefit from UK’s experiences.

　　Ⅱ. The basic interpretation rules

　　1. United Kingdom

　　In deciding whether there is any ambiguity in the statute, three rules have been developed by the judiciary for the purpose of interpreting statutes. These are the “literal rule”, the “golden rule” and the “mischief rule”.

　　A. Literal rule

　　As a general rule all statutes will be presumed to use words in their popular sense, unless the context otherwise requires, Clerical, Medical and General Life Assurance Society V Carter (1889) 22 QBD 444 at 448 per Lord Eacher, MR.This means that the words of a statute will be given their ordinary grammatical meaning.

　　The earliest reported case where a strict approach was taken to the interpretation of a fiscal statute was in Partington v Attorney-General and in particular, the speech of Lord Cairns, (1869) LR 4 HL 100 at 122. “…If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be. In other words, if there be admissible, in any statute, what is called an equitable construction, certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute.” Similar words were expressed by Rowlett J in Cape Brandy Syndicate V IRC (1920) 12 TC 358 at 366.[4]

　　B. Golden rule

　　Where the literal rule gives rise to a wholly unrealistic result the golden rule has been applied. This rule was first enunciated by Lord Wensleydale in Grey V Pearson (1857) 6 HLC 61 at 106. Where this rule is applied the ordinary sense of the words is modified to avoid absurdity or in consistency, but no further.[5]

　　C. Mischief rule

　　Mischief rule is derived from a famous case in the sixteenth century, Heydon’s case (1584) 3 Co Rep 7a. The barons of the Exchequer held that: “…for the sure and true interpretation of all statutes in general four things are to be discerned and considered: (1) what was the common law before the passing of the Act; (2) what was the mischief and defect for which the common law did not provide; (3) what remedy the parliament later resolved and appointed to cure the disease of the Commonwealth; (4) the true reason of the remedy. And then the office of all the judges is always to make such construction as shall suppress the mischief and advance the remedy, and to suppress subtle invention and evasion for the continuance of the mischief.” [6]

　　2. China

　　China is a civil law system country, traditionally based on German legal system, so precedent is only for reference. Interpretation of code becomes an important task for Chinese judges in their everyday work. Certainly it is the same situation in tax law practice.

　　Maybe the history of Chinese modern tax system is too short, [7] there is few academic research on the intersection question about interpretation of tax law and anti-avoidance rules. Review of Chinese literature, there are lots of narration about interpretation methods in civil law and criminal law circles. As to tax law interpretation methods in China, some tax scholars have given out just a brief narration: [8]

　　A. Literal interpretation. Literal interpretation in tax law is the basic interpretation rule. If the word in tax law is clear, a judge must respect the grammatical meaning.

　　B. Systematic interpretation. It means in the process of tax law interpretation, a judge have to consider the context and logic relation. In the meantime, the judge should harmonize with other source of laws, in particular coincide with constitution law.

　　C. Historical interpretation. To understand the real meaning, sometimes a judge should go back to the drafting documentation, talk with original drafters, analyze the historical intention.

　　D. Teleological Interpretation. Any law has its purpose, abstractly speaking, to protect justice. When a word or article of tax law is in vagueness or ambiguity, a judge may choose the meaning for more justice benefit.

　　Ⅲ. United Kingdom judicial responses

　　Tax avoidance is a big problem too in UK. How to respond, UK parliament has no any general anti-avoidance legislation. [9] In one of the minor ironies of tax law, the leading United States case adopting a judicial anti-tax avoidance doctrine was decided in 1935, [10] the same year that the House of Lords adopted a literalist approach interpreting English tax law in Westminster. English judges differ from their United States counterparts in both respects: they are more reluctant to use statutory purpose to interpret statutes, preferring to stick closely to the text, and they are more sympathetic to taxpayers. [11]

　　1. Duke of Westminster: tax avoidance approved

　　Unlike the U.S. courts, the U.K. courts have traditionally been unwilling to fashion judge-made rules to combat tax avoidance schemes. In the classic Duke of Westminster case, [12] the House of Lords refused to look through the form to the substance of a transaction. This case if often cited for the proposition that taxpayers are entitled to arrange their affairs so as to pay the least tax allowed by law, but such an abstract statement fails to convey the full flavor of this entertaining case. Avoidance transactions often take advantage of structural flaws in the system. The question is whether the courts will allow taxpayers to take full advantage of those flaws. [13]

　　2. Ramsay: The tide turns

　　Over time, the English courts changed their attitude. The landmark decision is W.T. Ramsay Ltd. v. Commissioners of Internal Revenue, [14] but there were indications of a change in approach even earlier. In Ramsay, the House of Lords held that the prearranged steps of a tax avoidance scheme could be integrated and treated as a whole where the taxpayer had intended them to operate as such. Ramsay v. IRC (supra) is considered to be the starting point for the development of a “new approach” to tax avoidance schemes.

　　3. Evolution of the Ramsay doctrine

　　The doctrine established in Ramsay was extended in Furniss v. Dawson. [15] Unlike Ramsay, the latter case did not involve a self-cancelling scheme. In Furniss v. Dawson, the taxpayers had negotiated for a sale of shares to a purchaser named Wood Bastow. Because a direct sale to Wood Bastow would have attracted a tax, the taxpayers decided to structure the deal by first transferring the shares to a newly incorporated Isle of Man company called Greenjacket, and having Greenjacket sell the shares to Wood Bastow. This would have allowed the tax on the sale to be avoided. The House of Lords held that “the relevant transaction…consists of the two transaction or stages taken together. It was a disposal by the respondents (taxpayers) of the shares in operating company for cash to Wood Bastow.” [16] Or, as put by Lord Roskill, “I am convinced that there was a disposal by the Dawsons (taxpayers) to Wood Bastow to Greenjacket at the behest of the Dawsons.” [17]

　　Ⅳ. What China can learn from UK’s experiences?

　　In China, with the development of market economy, the forms of transaction grow more and more complex. Simultaneously, the tax authorities have to face to kinds of tax avoidance schemes. It seems that the state council and legislation authorities demonstrate apparent hostility to tax avoidance schemes, but feel hard to find an effective policy or legislation tactics. My suggestion is, China can study UK’s tax practices, and learn more from UK’s experiences.

　　1. A general anti-avoidance rule

　　Until now, it is absent of a general anti-avoidance rule in United Kingdom. Obviously, tax avoidance is a matter of concern to the UK Revenue, but while the judicial anti-avoidance doctrines have continued to favor them, they have not always had the incentive to press for a general anti-avoidance legislation. In the meantime, many people worry that, taking the view that a general anti-avoidance rule is likely to introduce uncertainty into the law. [18]

　　What a question arises is, whether Chinese tax law should follow UK’s practice or not. In my opinion, an introduction of this general anti-avoidance rule into Chinese tax legislation is not a good choice, the reasons are the same as UK’s. A general anti-avoidance rule brings about legal uncertainty, too deep interference with civil society, even abuse of law. Especially in today’s China, administrative discretion is too broad.

　　2. Specific anti-avoidance rules

　　The UK has a number of specific anti-abuse provisions. This kind of rule, even though its application may be limited, presents the same kind of conceptual issues as a general anti-avoidance rule. In particular it may require a determination of the presence of a tax avoidance motive or of a business purposes, an example is section 703 of the Income and Corporation Taxes Act 1988. [19]

　　In Chinese tax law, there are a few specific anti-avoidance provisions. For example, Article 36 of Tax Imposition Management Law 2001 requires affiliated enterprises to be compliance with arm’s length rule, specially dealing with any anti-avoidance between affiliated enterprises. Compared with UK’s specific anti-avoidance provisions, the number of specific anti-avoidance provisions in China is apparently not enough.

　　 3. Legislative purpose

　　In UK, the development of a judicial anti-tax avoidance doctrine is one battleground on which the dispute between literalism and statutory purpose has been fought in England. [20] There is a wide variation amongst commentators in their use of the term “legislative purpose”. Following the terminology of Twining and Miers, the writer will treat it as relating to the “end in view” i.e. the consequences which a statute seeks to achieve.[21] It is now accepted that the inference of statutory purpose plays an important function in determining the statutory intention.

　　In China, tax scholars recognize that legislative purpose should be considered in tax law interpretation. [22] Actually few judges use this kind of interpretation method. More attention to legislative purpose, that is another one we can learn from UK’s experience in fighting against tax avoidance schemes.

　　Ⅴ. Conclusion

　　The UK like most other countries has reacted to tax avoidance schemes in a piecemeal manner. However, a few trends are readily discernible: (1) the increasing hostility of the Inland Revenue towards tax avoidance schemes; (2) increasing use of clearance procedures in tax avoidance statutes; [23] (3) increasing use of specific anti-avoidance rules in statutes in countering tax avoidance schemes, but having no any plan to introduce general anti-avoidance rules; (4) slowly evolving from literalism to use statutory purpose. The following map is my summing up:

　　 In 1994, China introduced modern market-based tax system. The system has worked for about ten years, now we can evaluate its advantages and disadvantages. What we can come to a conclusion is, it works not so well in countering tax avoidance schemes. After comparing with UK’s practices, we can learn more from UK’s experiences: firstly, we should consummate our tax legislation; secondly, judicial response is valuable. Certainly, it is not easy to integrate UK’s experiences into Chinese tax law culture, that is a topic needed to be further study.