Is there a GAAR and, if so, how is it applied?
Article 33 of the Assessment and Collection of Taxes Law is a general anti-avoidance provision, allowing the tax authorities to disregard any transaction through which the taxation of any person is reduced if they deem the transaction to be artificial or fictitious. There is no significant jurisprudence or published policy regarding the application of this article.
The Greek GAAR is contained in article 38 of the Tax Procedure Code (KFD), It provides that upon assessing taxes, tax authorities have the right to disregard any configuration of legal relations, which is artificially done (artificial manipulation) in order to avoid taxation and due to that the configuration results in obtaining tax benefits.
It is clarified that the tax authorities have not the discretion, as might one incorrectly consider drifted by the wording of the relevant provision, but have a circumcised power. This also arises from the continuity of the provision, which provides that in such case, when the tax authorities note an artificial manipulation as mentioned above, they are required to aim, for tax purposes, at their particular substance from a purely economic perspective.
The crucial elements of the actual provision, which must be met in order for the tax authorities to have the right to ignore a tax purposes legal relations’ configuration and which must be proved (burden of proof) by the tax authorities, are the following:
a) Manipulation or series of manipulations.
b) This manipulation (or a series of manipulations) should be artificial.
c) The artificial manipulation should aim at anti - avoidance.
d) The artificial manipulation should result in a tax advantage.
The tax authorities shall consider whether (each alternative or more):
1) The legal description of the individual stages which consist a manipulation, is incompatible with the legal substance of the whole manipulation.
2) The manipulation or a series of manipulations is applied in a manner that is not compatible with an ordinary (logical, normal) business behavior.
3) The manipulation or a series of manipulations includes elements which result in the hedging or the annulment between them.
4) The conclusion of transactions has a rotatory nature.
5) The manipulation or an array of manipulations leads to a significant tax advantage, but this is not reflected on the business risks, which the taxpayer undertakes, or on his cash flows.
6) The expected profit margin before the tax is significant compared to the amount of the expected tax advantage.
The law requires for the manipulation to be "artificial" in order for the tax authorities to have actually the right not to take it into account, it entails that if a manipulation results in a tax advantage, without being feigned in that sense, then the tax authorities have no right not to take it into account, but have to respect it.
To ascertain whether the artificial manipulation has indeed resulted in a tax advantage, the tax authorities should compare the amount of the tax due, given the present manipulation, with the amount due by the same taxpayer and under the same conditions, if this manipulation would not be taken into account.
As per Tax Procedural Law, tax payers are required to keep their books and records in line with uniform chart of accounts which is quite different from IFRS. If the books are not in conformance with these rules, tax authority/inspectors impose irregularity penalties during the tax inspections conducted occasionally.
The Mexican tax system contemplates transfer-pricing, thin capitalisation, CFC, back-to-back and tax re-characterisations as general anti-avoidance rules. Additionally, is should be noted that Mexico has been actively participating in the development and implementation of OECD guidelines and adapting the local set of laws in order to comply with the standards set forth by the BEPS action plans. In this sense, for the past few years, tax authorities have adopted more stringent requirements and standards in order to determine that anti-avoidance rules have been complied with.
A GAAR was introduced in the UK in 2013 and is intended to target abusive tax avoidance schemes. To determine whether a scheme should be counteracted, the question is whether there are abusive arrangements that give rise to a relevant tax advantage and it is reasonable to conclude that the tax advantage was the main purpose, or one of the main purposes, of the arrangements. The objective test for abuse is whether entering into the tax arrangements, or carrying them out, cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances. This is termed the double reasonableness test.
The Finance Act 2016 has introduced several new measures to bolster the GAAR in the UK. These include allowing HMRC to issue provisional counteraction notices within normal assessment time limits and the introduction of GAAR penalties of up to 60% of the counteracted tax.
It is HMRC’s intention that the GAAR be applied initially by taxpayers themselves, through their own counteraction using self-assessment or in their accounts and adjusting any tax advantage on a just and reasonable basis. HMRC also has powers of counteraction and matters may therefore proceed to litigation to be decided by the courts.
To date there have been no reported decisions on the GAAR. It is noteworthy that notwithstanding the GAAR legislation is currently invariably implemented with its own targeted anti-avoidances rules (TAARs) so that the GAAR exists as a mechanism of final resort.
Yes, the ITA contains anti-avoidance provisions. We are not aware they have been used to any wide extent since the implementation of the ITA.
Japan does not have general anti-avoidance rules or GARR in a literal sense (e.g., rules which could apply to all or whatever circumstances or transactions), but does have anti-avoidance provisions applicable to some specific situations.
One is an anti-avoidance provision applicable to certain closely held corporations (corporations controlled more than 50% by three or less shareholders); there, if an act or accounting of the subject taxpayer which is a closely-held corporation unjustifiably reduces the corporation tax burden of that taxpayer, then the Japanese tax authority is entitled to disregard the legal form of the transaction adopted by the taxpayer and to impose corporation tax based upon another legal form that the Japanese tax authority finds to be more natural and reasonable. For the purpose of this rule, the term “unjustifiably reduces” is generally interpreted to mean the situation where the act or accounting of the subject taxpayer is so extraordinary or strange that there is no reasonable business or financial reason to do such act or accounting other than for the purpose of tax avoidance.
Another one is an anti-avoidance provision applicable to corporate reorganization transactions (e.g., mergers, divestures, share exchanges, etc.); there, if an act or accounting of the subject taxpayer which is a party to a corporate reorganization transaction unjustifiably reduces the corporation tax burden of that taxpayer, the other parties to that transaction or their respective shareholders, then the Japanese tax authority is entitled to disregard the legal form of the transaction adopted by the taxpayer and to impose corporation tax based upon another legal form that the Japanese tax authority finds to be more natural and reasonable. For the purpose of this rule, the term “unjustifiably reduces,” as interpreted by a recent Supreme Court decision, means the situation where the taxpayer has abused relevant tax provision regarding the corporate reorganization rules.
Yet another one is an anti-avoidance provision applicable to the Japanese consolidated taxation regime; there, if an act or accounting of the subject taxpayer which is a member of the Japanese consolidated group unjustifiably reduces the corporation tax burden of that taxpayer, then the Japanese tax authority is entitled to disregard the legal form of the transaction adopted by the taxpayer and to impose corporation tax based upon another legal form that the Japanese tax authority finds to be more natural and reasonable. There has been no precedent on the interpretation of the term “unjustifiably reduces” and it remains unclear how that term will be interpreted by courts.
Recently, the first two anti-abuse provisions are very actively invoked by the tax authority in issuing assessments, claiming a need to secure an appropriate taxation by disregarding the legal form of the transaction adopted by the taxpayer. Practitioners are generally concerned about such tendency, because these anti-abuse provisions will often result in taxation that cannot be foreseeable from the text of the tax statute.
Yes, Hong Kong has a GAAR allowing the tax authorities to disregard or review as they see fit any arrangement entered into for the sole or dominant purpose of enabling a person to obtain a tax benefit in Hong Kong. It also has specific anti-avoidance provisions dealing with specific circumstances (for instance, restrictions on interest deductions or on using losses in certain transfers of companies).
The tax authorities have no hesitation arguing that an arrangement is subject to the GAAR or specific anti avoidance provisions in its discussions with taxpayers and thereafter in court. In fact, in many cases, GAAR is an automatic fall back position in the event all else fails.
The U.S. does not have a general statutory GAAR, but relies on judicially developed doctrines such as substance over form, business purpose, sham transaction and economic substance. In 2010, Congress codified the judicially developed economic substance doctrine. Under Section 7701(o), where the economic substance doctrine is relevant, a transaction will be deemed to have economic substance only if it changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.
In addition, many provisions of the tax code and regulations have anti avoidance provisions.
U.S. tax treaties contain a Limitation on Benefits (LOB) provision that limits “treaty shopping” by non-residents of the treaty country to claim benefits under the treaty.
The anti-abuse tax measures regulated by Spanish Tax legislation could be divided into:
A. General tax anti-abuse provisions:
a) Conflicts in the application of tax regulations: This conflict would exist when the taxpayer avoids, total or partially, the taxable event or reduces the taxable basis (or the tax due) through transactions in which any of the following occurs:
- Said transactions, considered individually or as a whole, are notoriously artificial or not typical for achieving the result obtained.
- They do not derive into material legal or economic effects different from the tax saving or the effects that would have been usually obtained.
b) Simulation: this is understood to occur when there is another hidden purpose under the appearance of a legal transaction, which could be (i) not entering into any agreement or (ii) entering into any other contract than the one intended.
B. Specific tax anti-abuse provisions as regulated expressly in each area of tax law in order to prevent a specific kind of transaction or apply a different tax treatment to that sought by the parties.
a) Corporate Income Tax: A specific anti-abuse provision is applied for CIT purposes within the scope of restructuring transactions. In order to apply the neutral tax regime, the existence of valid economic reasons (different from tax reasons) should be accredited by the taxpayers.
b) Transfer Tax: An anti-abuse clause is established by virtue of which the acquisition of securities/shares representing a controlling participation in companies where, at least 50% of its assets are real estate located in Spain may be subject to Transfer Tax.
c) Related entities: In general terms, specific anti-abuse provisions have been incorporated to the Spanish tax legislation in order to ensure that transactions carried out by related entities are valued at fair market value.
The above-mentioned GAAR provisions are focused on dealing with (i) valid economic reasons to be accredited within corporate restructurings under the tax neutral regime and (ii) the accrual of Transfer Tax upon the acquisition of more than 50% over land rich companies.
In general terms, it could be said that the Tax Authorities (and some administrative or judicial courts) tend to apply the wording of the law in broad terms (based on its spirit) instead of specifically applying the Spanish GAAR provisions as they would require to follow the procedure set out in the Spanish regulations.)
The Austrian General Fiscal Code (Bundes¬abgabenordnung - BAO) contains a general anti-abuse provision. The provision – Art 22 – incorporates the substance-over-form principle into Austrian tax law and generally allows the tax authorities to disregard transactions or structures which have been chosen solely for the purpose of avoiding or reducing.
Apart from this general provision several more specific anti-abuse provisions can be found in a variety of Austrian tax laws. Examples are the principle of “actual place of management” in the field of corporate taxation, anti-abuse rules in the participation exemption, which take away the benefit of the participation exemption from dividends received from passive tax haven companies, or CFC legislation for offshore investment funds etc.
Yes, German tax law operates a GAAR. As a matter of principle, it shall not be possible to circumvent tax legislation by abusing legal structuring options (Missbrauch von rechtlichen Gestaltungsmöglichkeiten). Abuse of law shall be given, if an inappropriate legal structure is chosen that results in tax advantages for the taxpayer or another person that are not foreseen by law compared to an appropriate legal structure. No abuse of law shall in contrast be given, if the taxpayer demonstrates the existence of non-tax reasons for the chosen legal structure, which are - according to the overall picture of the individual case - of relevance. In tax audits tax authorities frequently try to challenge structures that they regard as aggressive as abusive based on the GAAR. Local tax courts and the Federal Tax Court also apply the GAAR, but generally less extensive than the German tax authorities.
As a founding principle of Belgian tax law, taxpayers have the right to organise their affairs in the most tax-efficient way. There is no ‘sham’ and hence no fraud when a taxpayer enters into a transaction, even if the transaction is carried out in a rather unusual way, provided the taxpayer accepts all the legal consequences of his/her actions (Cass. June 6th, 1961, Brepols) and this view is irrespective of the fact that the taxpayer’s action has been performed with the sole aim of reducing tax (Cass. March 22nd, 1990, Au Vieux Saint Martin).
If the taxpayer does not accept all the legal consequences of his/her actions, then the taxpayer is engaging in a ‘sham’ transaction. In such case he or she is considered to be illegally-evading tax and committing fraud, which is subject to criminal prosecution.
To tackle tax avoidance, as opposed to tax evasion, Belgium introduced a GAAR in 1993. After years of legal uncertainty on the exact scope of its application, the GAAR was rewritten in 2012.
Under the Belgian GAAR, a transaction or series of transactions may not be opposed against the Belgian tax authorities if they prove an ‘abuse of law’. Such an ‘abuse of law’ is deemed to occur when the taxpayer carries out a transaction in which the taxpayer either avoids the application of tax provisions in a manner that is not compatible with those provisions’ objectives or claims a tax benefit that is contrary to the legislative intent of a respective tax provision.
If the tax authorities supply evidence of an abuse of law, then the taxpayer can prevent the application of the GAAR by proving that the underlying transaction has additional relevant objectives other than tax avoidance.
In practice, the GAAR targets three kinds of situation: (i) where the only objective of a transaction is to obtain a tax advantage; (ii) where the non-tax objectives are general and not specifically connected with the underlying transaction; or (iii) where the non-tax objectives, although connected with the underlying transaction, are immaterial.
Belgian tax law also provides various specific anti-avoidance provisions, such as: the provisions relating to the granting of abnormal or gratuitous advantages between businesses; the non-deductibility of payments to certain non-residents; the non-opposability of the transfer of certain assets to tax havens; the refusal of ‘tax neutrality’ for mergers/demergers when their principal objective (or one of their principal objectives) is tax evasion or tax avoidance; and the refusal of the participation exemption of an arrangement or a series of arrangements that, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the Parent-Subsidiary Directive, are artificial with regard to all relevant facts and circumstances.
Yes, Italian tax law operates a GAAR which applies to all taxes, both direct and indirect, with the sole exclusion of custom duties.
With Legislative Decree no. 128/2015, the Italian Government enacted a GAAR replacing and widening the anti-avoidance rule previously in force and taking into account the anti-abuse principles developed over the last decade by the Italian Supreme Court.
The new GAAR defines as an abuse of law "one or more transactions lacking any economic substance which, despite being formally compliant with the tax rules, achieve essentially undue tax advantages".
A transaction is deemed to lack economic substance when they imply facts, actions and agreements, even related to each other, that are unable to generate significant business consequences other than tax advantages. The GAAR:
- identifies the following as elements proving the lack of economic substance: inconsistency between the qualification of the individual transactions and their legal basis as a whole and the choice of legal instruments which are not consistent with the ordinary market practice; and
- states that a tax advantage is undue where it consists of benefits that, even if not immediate, are achieved in conflict with the purpose of the relevant tax provisions and the principles of the tax system.
The GAAR clarifies that no abuse of law can be challenged when a transaction is justified by not-negligible business purposes (other than of a tax nature) including those aimed at improving the organizational and managerial structure of the business.
According to the GAAR, tax abusive transactions do not give rise to criminal liability, but are subject to administrative penalties.
Malaysia has a general anti-avoidance provision (i.e. Section 140 of the Income Tax Act 1967). This provision confers the Director General of Inland Revenue vast authority to disregard or vary a transaction and make such adjustment as it thinks fit. This is done with a view to counteracting the effect of the transaction if the Director General of Inland Revenue has reason to believe that the transaction has the effect of:
- altering the incidence of tax which is payable or suffered by or which would otherwise have been payable or suffered by any person;
- relieving any person from any liability which has arisen or which would otherwise have arisen to pay tax or to make a return;
- evading or avoiding any duty or liability which is imposed or would otherwise have been imposed on any person by this Act; or
- hindering or preventing the operation of the Act in any respect.
If the dominant purpose of a transaction has no commercial purpose, that transaction will be disregarded or varied on the basis of tax avoidance by the tax authority. Therefore, the objective of the exercise must be to achieve a commercial purpose and not to enjoy tax efficiency without any other commercial purpose for the transaction. However, if tax savings arise by the manner in which the commercial transaction is implemented or structured, that is to be regarded in law as tax mitigation.
As Section 140 covers a very extensive and wide-ranging number of transactions carried out by taxpayers, the Malaysian Courts have examined the extent of enforceability of this anti-avoidance provision on taxpayers. Analysis of case law suggests that the Malaysian Courts appear to have taken the view that transactions whose dominant purpose lacks any commercial goal will be labelled as tax avoidance schemes and disregarded or varied by the tax authorities. In order to fall outside the ambit of the general anti-avoidance rule, taxpayers must demonstrate that a transaction has a commercial purpose and is not undertaken for the sole purpose of reducing tax.
Ireland has operated a statutory GAAR since the late 1980s. It is a fully OECD compliant provision. It is deployed by the Irish Revenue Commissioners in cases of tax avoidance (although specific anti-avoidance provisions are often used by the Revenue Commissioners in preference to or in relation to the GAAR). The Revenue do not invoke the GAAR provisions lightly to engineer settlements of tax disputes, preferring to reserve their powers to invoke them for more extreme and obvious cases of tax avoidance.
A number of cases have been taken through the Courts in relation to the scope and interpretation of the GAAR. When the GAAR was first introduced, it required that the Irish Revenue form an opinion that the transaction was a tax avoidance transaction. In recent years this position has been altered and each taxpayer must now self-assess the application of the GAAR to any transaction. If a taxpayer is in doubt about the application of the GAAR to any transaction, it is possible to file a notice with the Irish Revenue identifying the transaction and requesting them to take a view on it. Should the Irish Revenue conclude that the transaction is a tax avoidance transaction to which the GAAR applies, the fact that a taxpayer has filed such a notice will reduce the penalties applicable for non-payment of tax.
French tax law provides for a GAAR according to which the FTA may disregard any legal arrangements they consider to be either (i) fictitious or, (ii) by seeking a literal application of legal provisions and decisions which contradicts the objective set forth by the French legislator, motivated by the exclusive purpose of avoiding or reducing the tax burden. If such "abuse of law" is identified, a specific 80% tax penalty based on the amount of avoided tax is applicable.
If such a procedure is undertaken by the FTA, the taxpayer is entitled to consult the Abuse of Law Committee (“Comité d’abus de droit”) which only gives advisory opinions that do not bind the tax administration.
In practice, especially in recent years, this general anti-avoidance rule has often been enforced by both the FTA and the courts.
Australia has a GAAR that applies to cancel a tax benefit arising from a scheme that was entered into for the sole or dominant purpose of obtaining that advantage.
There are numerous processes around the application of the GAAR. Firstly, the ATO has released public guidance, in the form of Practice Statements and public rulings regarding the circumstances in which the GAAR will seek to be applied by the Commissioner and the process around its application.
In most cases, the application of the GAAR must be authorised by Senior Executive Service (Band 2) level within the ATO. Prior to the application of the GAAR, a review panel will consider the arguments for its application and would also hear submissions on behalf of the taxpayer. This review panel (known as the GAAR Panel) is not a judicial body and does not make a decision that is binding on the ATO. Rather, they are an advisory and review body to ensure appropriate rigour is engaged in the application of the GAAR, given the seriousness of is operation.
The Australian government has, in recent times, focused particularly on multinational tax avoidance and has enacted or proposed new anti-avoidance provisions, the Multinational Anti-Avoidance Law (MAAL) and the Diverted Profits Tax (DPT) to combat these activities. MAAL is an anti-avoidance provision enacted in 2015 that applies to certain schemes on or after 1 January 2016.
Broadly, MAAL applies to schemes where:
- a foreign entity makes a supply to an Australian customer;
- some or all of the activities directly connected with that supply are undertaken by an Australian entity that is an associate of, or commercially dependent on the foreign entity;
- the foreign entity derives income from that supply in circumstances where some or all of the income is not attributable to an Australian permanent establishment of the foreign entity; and
- a principal purpose of the scheme was to obtain a tax benefit.
MAAL only applies to 'significant global entities'. These are entities that have an annual global income in excess of AUD 1 billion or are members of a consolidated group where the global parent exceeds that threshold. Where the relevant criteria are satisfied, MAAL permits the Commissioner of Taxation to cancel the tax benefit obtained and impose substantial penalties.
The DPT is a proposal designed to discourage those profits properly produced in Australia from being artificially recognised as the accruing in another jurisdiction to secure a tax advantage. to the DPT will apply to multinationals with global revenue in excess of AUD 1 billion (although it is also expected that there will be some Australian based de minimus thresholds). As currently proposed, the DPT is triggered in circumstances where multinationals enter into arrangements that reduce the amount of tax that would otherwise have been payable by 20% and it is reasonable to conclude that those arrangements were entered into to secure a tax reduction. Where triggered, the DPT will impose a 40% tax on the amount of profits diverted.
In Switzerland, GAAR are not contained in a specific act. The Federal Supreme Court developed through the years a general tax avoidance theory, in principle applicable to all Swiss taxes. The application of this theory, applied by all Swiss courts and tax authorities, has for consequence that tax authorities get the right to tax the taxpayer’s legal structure based on its economic substance in certain situations.
In addition, Swiss tax authorities generally apply the arm’s length principle and follow the OECD transfer pricing guidelines. Swiss regulation also contain anti avoidance provisions.