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Tax Policy
WHAT ARE GENERAL ANTI-AVOIDANCE RULES?
Thomson Reuters Tax & Accounting
February 20, 2024 · 7 minute read
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Thomson Reuters Tax & Accounting
February 20, 2024 · 7 minute read
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Understand what GAAR looks like in the U.S., UK, and elsewhere internationally.
Jump to:
What are general anti-avoidance rules (GAAR)?
--------------------------------------------------------------------------------
How are GAAR rules applied?
--------------------------------------------------------------------------------
What is the general anti-abuse rule?
--------------------------------------------------------------------------------
Does the U.S. have a GAAR?
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International GAAR rules
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Keeping up with tax avoidance regulation
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Abusive tax planning is not just a concern among U.S. tax authorities, it is a
global concern. Governments around the world have long taken steps to crack down
on tax evasion, such as using general anti-avoidance rules, better known as
GAAR.
Around the world, many jurisdictions — such as Australia, the Netherlands,
China, Germany and Canada — have adopted GAAR in an effort to eliminate
unacceptable tax avoidance practices. Some jurisdictions are working to revise
the policies they already have in place.
To ensure tax compliance and resolve tax questions that may arise when
conducting business-related transactions, it is critical that corporate tax
specialists keep pace with local and international anti-avoidance legislation in
today’s ever-changing legislative environment.
To help today’s corporate tax professionals better understand some of the
methods implemented to thwart abusive tax planning, this article will take a
closer look at GAAR and how to keep up with tax avoidance regulation.
WHAT ARE GENERAL ANTI-AVOIDANCE RULES (GAAR)?
GAAR is a set of principles-based rules within a country’s tax code that aims to
eliminate unacceptable tax evasion practices. This is done by essentially giving
that country’s tax authority the power to deny a particular tax benefit that
would lead to tax avoidance or to increase the tax liability against the
taxpayer.
There is no one-size-fits-all approach to GAAR, as the intricacies of the rules
vary by country. In general, GAAR focuses on any aspect of a transaction that is
contrived and undermines the tax law in an effort to obtain a tax benefit.
One of the most cited challenges with GAAR is that it is too often subject to
interpretation. In other words, what is considered to be “tax avoidance” can be
interpreted and defined differently by different people. This can make it
difficult to distinguish between transactions that are, or are not, under GAAR.
Furthermore, the inconsistent application of GAAR across those jurisdictions
that have enacted the rules only adds to the complexity.
HOW ARE GAAR RULES APPLIED?
The application of GAAR generally requires that a tax authority make an
assessment. This is a multi-step process that often involves the following:
1. Identify a scheme: An entire transaction can be identified as a scheme, or
it can also apply to specific components of a transaction. Either way, there
needs to be a scheme.
2. Identity a tax benefit: Tied to the scheme is a tax benefit. A tax benefit
could mean:
* A postponement of a liability to pay a tax.
* A reduction in a liability to pay a tax.
* Any action that results in an amount that would otherwise be subject to tax
not to be taxed, or an amount of gross revenue to be exempt income or
otherwise not subject to tax.
* Any other advantage that arises because of a delay in the payment of tax.
3. Clear intent: Next, it needs to be established that a taxpayer’s primary
purpose for their actions was to obtain the identified tax benefit.
It is important to note that GAAR can take various forms and can be applied to
different taxes such as Value Added Tax (VAT) or Goods and Services Tax (GST),
which are consumption taxes applied to the purchase price and cost of goods and
services.
When looking to apply GAAR, it is important to pay close attention to several
factors such a jurisdiction’s legal design of GAAR, the capacity of the tax
authority to appropriately apply the GAAR in a balanced manner, as well as that
country’s infrastructure.
WHAT IS THE GENERAL ANTI-ABUSE RULE?
In 2013, the UK introduced its general anti-abuse rule to counteract abusive tax
avoidance schemes. The rule gives the HM Revenue & Customs (HMRC) power to
thwart tax abuse and recover lost revenues by adjusting or issuing assessments
or amending or denying claims. HMRC must be able to prove that the tax
arrangements in question are, in fact, abusive.
The UK rule applies to various taxes including, but not limited to:
* Income tax
* Corporation tax
* Petroleum revenue tax
* Inheritance tax
* Diverted profits tax
Several taxpayer safeguards have been put into place. For instance, the GAAR
advisory panel, which is independent of HMRC, must weigh in before a final GAAR
counteraction notice can be issued.
DOES THE U.S. HAVE A GAAR?
The United States’ first GAAR, Section 7701(o) of the Internal Revenue Code, was
signed by President Barack Obama. It went into effect on March 30, 2010.
As outlined by the IRS, Section 7701(o), “defines ‘economic substance doctrine’
as the common-law doctrine that disallows tax benefits under subtitle A of the
Internal Revenue Code if the transaction that produces those benefits lacks
economic substance or a business purpose.”
A transaction is considered to have economic substance if “the transaction
changes in a meaningful way (apart from Federal income tax effects) the
taxpayer’s economic position,” and also if “the taxpayer has a substantial
purpose (apart from Federal income tax effects) for entering into such
transaction,” according to the IRS.
In a notable development, the IRS issued in April 2022 a memo communicating
updated guidance on the economic substance doctrine. The memo removed the IRS
procedural requirements for relying on the economic substance doctrine
(previously a required four-step process).
The change also included, among other things, the removal of the requirement for
executive approval. Under the revision, Large Business & International Division
(LB&I) and Small Business/Self-Employed Division (SB/SE) examiners only need
approval from their immediate supervisor to declare a penalty under the economic
substance doctrine.
As a result of the changes, it is now easier for the IRS to proclaim that a
transaction is deficient of economic substance or a business purpose.
INTERNATIONAL GAAR RULES
The crackdown on multinational companies that allegedly evade taxation or reduce
tax burden in their home country by moving operations or migrating intangibles
to lower tax jurisdictions continues to gain momentum. Enter the Organization
for Economic Cooperation and Development (OECD)’s Base Erosion and Profit
Shifting (BEPS) initiative.
According to OECD, BEPS practices cost countries between $100 billion and $240
billion in lost revenue annually. This is equivalent to 4% to 10% of the global
corporate income tax revenue.
In an international collaboration to stamp out tax avoidance, ensure a more
transparent tax environment, and improve the coherence of international tax
rules, more than 140 countries and jurisdictions are implementing 15 Actions to
equip governments with the domestic and international rules and instruments
needed.
Action 3, for instance, outlines approaches to counter offshore structures that
shift income from the shareholder jurisdiction. Other Actions address such areas
of concern as treaty abuse, transfer pricing documentation, the digital economy,
and more.
KEEPING UP WITH TAX AVOIDANCE REGULATION
Tax professionals may have a clear understanding of their responsibilities, and
the standards and principles of ethics they must adhere to, but ensuring
compliance amid ever-changing legislation can be challenging. This can be
especially true for tax professionals navigating the complexities of
international tax.
With the right tools and resources in place, such as the Thomson Reuters
Checkpoint Catalyst tax research tool, corporate tax specialists can easily stay
on top of local and international anti-avoidance legislation. Checkpoint
Catalyst provides the research tools and expert guidance tax professionals need
in today’s dynamic business environment.
--------------------------------------------------------------------------------
SOFTWARE
BEPS Action Manager: BEPS software that supports a standardized worldwide
compliance process.
--------------------------------------------------------------------------------
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