Gearing up for GAAR – perspectives on the global tax-avoidance clampdown
August 2013 | EXPERT BRIEFING | CORPORATE TAX
As governments around the world look to crackdown on tax avoidance and evasion in an effort to increase their tax receipts, we look at the different approaches that some countries have adopted in introducing general anti-avoidance rules (GAARs) and tackling tax abuse.
As a set of principles-based rules within a country’s tax code, a GAAR enables tax authorities to deny the tax benefits of a transaction or arrangement leading to tax evasion or avoidance. GAARs have already been introduced in a number of countries including Australia, Canada, China and South Africa, with the UK and India soon to follow suit. Other major economies, including the US, do not have a GAAR at all but rely on targeted anti-avoidance provisions.
Australia and Canada have had a GAAR since the 1980s (and in other guises before that) but its introduction in South Africa and China has been more recent. South Africa repealed and replaced its GAAR, with the new rules coming into effect in late 2006. In China, the State Administration of Taxation (SAT) has published more than 30 circulars relating to tax anti-avoidance issues since the enactment of its 2008 Enterprise Income Tax law. The process is ongoing.
In the UK, GAAR will take effect for most taxes later in 2013. A GAAR was introduced in India in the 2012 Finance Act, but implementation has been delayed by two years until the financial year 2015-16. This has provided taxpayers with a small window of opportunity to review their existing structures and get their tax affairs in order.
Facing the challenges
Approaches to GAAR vary from country to country. In most cases, GAAR will target any abnormal step or part of a transaction for which the sole or main purpose is to obtain a tax benefit or where it lacks commercial substance or has created non-arm’s length rights and obligations. However, one of the greatest challenges has been the interpretation and enforcement of the rules.
The wording and application of a GAAR is subject to interpretation by a number of different groups including taxpayers, tax professionals, the revenue authorities and, perhaps most importantly, the courts. In South Africa, for example, there is no legal distinction between tax planning and impermissible tax avoidance. Instead, it is left to the courts to decide some time after the transaction has occurred.
Another challenge is consistent implementation. In China, for example, local tax bureaus have the authority to interpret and enforce rules independently. Similar cases can be handled differently and result in different outcomes across provinces and even districts within a city. Moreover, SAT interpretations and definitions tend to be vaguely written yet the burden of proof always lies with the taxpayer.
Burden of proof
In Canada the onus is on the Minister of Revenue to prove whether a tax-avoidance transaction is ‘abusive’. The Minister must show a clear policy intent within the framework of the legislation and an abuse of that policy intent through the transactions that have been carried out. Given the complexity of the legislation and the uncertainty surrounding its intent, this is no simple task.
Similarly, if a case is brought to court in the UK, the burden will lie with HM Revenue & Customs (HMRC) rather than the taxpayer to prove that tax arrangements are abusive rather than for the taxpayer to prove that they are not. HMRC must refer cases to an independent advisory panel, although its opinion does not bind HMRC. The courts will ultimately decide cases of dispute.
The Australian Taxation Office has lost a number of cases dealing with the application of its anti-avoidance provision (called Part IVA) because the tax benefit element could not be proven. Consequently, the law has been amended to apply Part IVA to all schemes/arrangements carried out with the sole or dominant purpose of securing a tax advantage for the taxpayer – irrespective of whether a tax benefit can be proven. The amendments also make it easier to prove that a scheme gives rise to a tax benefit by comparing the tax consequences of the actual scheme to the tax consequences that might reasonably be expected to have resulted if the scheme were reconstructed in another reasonable way. With these amendments that apply retrospectively from 16 November 2012, there is a risk that Part IVA will catch more arrangements.
Preparing for GAAR
In any country where GAAR is in place or is being considered, companies are advised to undertake a GAAR ‘health check’ on some of the key aspects of their business. Some of the steps that a company should take to prepare for GAAR include:
Reviewing the corporate governance framework.Ensure that the corporate governance framework includes a documented process for significant transaction sign-off, particularly where the transactions are material or have particular characteristics that may attract scrutiny by the tax authorities.
Keeping contemporaneous documentation.Such documentation is integral to defending a company’s position against a GAAR challenge, particularly in the case of transfer pricing. It should set out the intended purpose of the overall transaction, as well as each step within the transaction. Documentation setting out alternative possibilities may also help to demonstrate that the final position taken was the only reasonable option to achieve the commercial objectives sought.
Reviewing inter-company agreements.Regularly review inter-company arrangements and tax-efficient supply chain management agreements to ensure that they continue to be commercially justifiable.
Seeking an advance tax ruling.Where there is concern that a transaction may attract scrutiny, if possible, obtain an advance tax ruling from the relevant authorities to determine whether GAAR could be invoked. If a company is already involved in a scheme that may be subject to GAAR, consider making a voluntary disclosure, as this could result in a reduction in any penalties that might be incurred.
Getting independent advice.Businesses – especially foreign entities – should enlist the help of a local professional adviser in the planning and structuring oftransactions, and to ensure they have appropriate tax risk management policies in place.
Rajesh Sharma is chairman of the Tax Committee and Mike Adams is a tax director at Nexia International. Mr Sharma can be contacted on +44 (0)20 7131 4181 or by email: email@example.com. Mr Adams can be contacted on +44 (0) 20 7436 1114 or by email: firstname.lastname@example.org.
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Rajesh Sharma and Mike Adams