Is there a general anti-avoidance rule (GAAR) and, if so, how is it applied by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only, etc?
Tax (2nd Edition)
The GAAR is a part of the Spanish taxation system as it is included in General Tax Law. It is usually called as “conflict in the application of tax regulations” and it was modified in 2015 in order to include diverse penalties. These penalties arise when any of the following situations is evidenced:
a) The lack of payment of all or a part of the tax debt within the period set in the relevant tax regulation.
b) Obtaining an undue refund according to the relevant tax regulation.
c) The request of an undue tax refund, benefit or incentive.
d) The unfair setting or proof of positive and negative records or tax credits to be compensated or deducted from the tax base or the instalment of future returns, both of the own contributor or of a third party.
By means of this change of the regulations, tax authority is entitled to impose penalties to contributors who, without breaching directly tax regulations, carry out abusive taxation by means of corporate restructurings or other strategic corporate decisions that seek for potential tax savings and take advantage of the existing maladjustments.
The number of penalties has increased significantly and therefore there is also a higher number of litigations at Court.
Yes, a general anti-avoidance rule is regulated under Romanian law and it is applied by the tax authorities in cases where the economic reality of the verified transactions is challenged. In addition, the tax authorities are compelled to refer the tax disputes to the criminal investigation authorities – whenever the transactions performed by the taxpayer were “suspected” by the tax inspectors as being fraudulent. Moreover, in light of Anti-Tax Avoidance Directive (ATAD) provisions, additional measures will be set against tax avoidance practices that directly affect the functioning of the internal market. In this framework, special attention must be paid to any aspects which may trigger suspicions of criminal offenses being committed by the taxpayer.
Again, we have limited our response to income tax. Australia has a number of income tax GAARs, which apply to:
- Schemes to obtain an income tax benefit;
- Dividend stripping;
- Imputation benefit schemes;
- Multinational anti-avoidance (i.e. the MAAL); and
- Diverted profits (i.e. the DPT).
The most commonly applied GAAR is the GAAR which applies where there is a scheme that gives rise to an income tax benefit and it can be concluded, on an objective analysis, that a person or persons entered into or carried out the whole or a part of the scheme, for the sole or dominant purpose of enabling the taxpayer to obtain the tax benefit.
The GAAR is commonly raised by the ATO in negotiations and often litigated.
The ATO has internal procedures designed to ensure that the Commissioner applies the GAAR in a consistent and coherent fashion. The most important of these procedures is the ATO’s “General Anti-Avoidance Rules” (GAAR) Panel. The GAAR Panel is an internal ATO advisory body, comprised of senior ATO officers and business and professional people external to the ATO who are invited to participate. Where an ATO officer or audit team proposes to apply a GAAR to an arrangement, the matter will be considered by the GAAR Panel which will provide advice and recommendations to the officer or team on how they ought to proceed. However, the final decision on whether to apply the GAAR still rests with the relevant officer or team charged with responsibility for the matter. The ATO officer or team seeking to apply the GAAR must appear before the GAAR Panel and the taxpayer will also be extended an invitation to appear and provide submissions.
In recent years, the Australian government has sought to strengthen the GAAR by introducing two new elements specifically targeted at multinational enterprises – the MAAL and the DPT.
The MAAL commenced on 1 January 2016 and applies to schemes entered into by SGEs that avoid having a taxable presence in Australia.
The DPT commenced on 1 July 2017 and applies to SGEs to ensure the economic substance of their activities in Australia is properly taxed and profits are not diverted offshore. The DPT applies a penalty rate of 40% to any profit deemed to be diverted.
As the MAAL and the DPT have only just been introduced, they have not been the subject of litigation.
The general anti-abuse rule applicable in France is the 'abus de droit' (abuse of law). It allows the FTA to disregard or disqualify any legal transaction if it is deemed to be abusive from a tax perspective - i.e. (i) simulation or (ii) in contradiction with the spirit of the law and solely motivated by the avoidance or mitigation of tax liabilities. It covers all direct and indirect taxes applicable in France.
It is not only raised in negotiation but commonly litigated since the French tax position is not always followed by the judges. If the FTA bring a claim under the GAAR, either the taxpayer or the FTA can choose to go before a 'Comité de l’abus de droit fiscal' (Committee for anti-abuse of tax law), which is an independent committee that will review the case. Its review is not binding but the burden of proof remains with the FTA if the review is in favour of the taxpayer's position. Penalties are increased to 40% in case of abuse of law and can reach 80% in case of tax fraud.
A GAAR was incorporated into the Income Tax Act in 1988 with the stated intention of curbing abusive tax avoidance transactions and preserving the fairness of the Canadian tax system.
In general terms, the GAAR provides that if a transaction results in a tax benefit (including the reduction, avoidance or deferral of taxes), and the primary purpose of the transaction was to obtain the benefit, and if the transaction results directly or indirectly in a misuse or abuse of the provisions of the legislation, the transaction itself may be invalidated. The CRA has since applied the GAAR to a wide variety of transactions and the issue has been heavily litigated, with most cases turning on the question of whether there is a “misuse or abuse.” The CRA has also increasingly resorted to the GAAR to establish a secondary basis for assessing.
Where a CRA auditor proposes to issue an assessment based on the GAAR, the file must first be reviewed by the CRA’s Abusive Tax Avoidance and Technical Support Division. The Division may then decide to refer the matter to the CRA’s GAAR Committee, comprised of representatives of the CRA, the Department of Finance and the Department of Justice, for its recommendation as to the GAAR’s application. As of late 2016, the Committee had reviewed more than 1300 cases and determined that the GAAR applied in approximately 80% of them.
A new GAAR was introduced in 2012, after the previous GAAR (introduced in 1993) turned out to be ineffective. Under the current GAAR, a transaction or series of transactions may be disregarded by the tax authority if abuse of law is proven. The latter is proven when a taxpayer either avoids or applies the application of a tax provision that provides resp. for taxation or an exemption, in a way that is contrary to the objective of the provision. In such case, the taxpayer may still avoid the application of the GAAR if he can demonstrate that the transaction was driven by other relevant motives that are not tax-driven. If the taxpayer is not able to provide such non-fiscal objectives, the tax administration may restore the taxable basis as if no tax abuse has taken place.
The current GAAR is relatively recent. It is therefore difficult to gauge how it is generally applied by the authority. The provision hasn't really yet been put to the test in court. It is however often an element that is cleared with the advance ruling commission when a ruling request is submitted.
There is still not general anti-avoidance rule (GAAR) under the meaning of the Anti-BEPS Directive. Anyway, the Bulgarian Corporate Income Tax Act stipulates that where one or more transactions, including those between unrelated persons, have been effected under conditions that lead to tax evasion, the tax base shall be determined without taking into consideration the said transactions, or certain conditions thereof, or the legal form thereof, and what is taken into consideration shall be the tax base that would have been achieved if a customary transaction of the respective type had taken place at arm’s length prices and sought to achieve the same economic result, without leading to tax evasion.
The said rule is always observed by the tax authorities during an audit. The enforcement of the GAAR is quite often litigated by companies who have made their tax structuring in advance.
The United States 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) of the tax code, 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 legislation of Ukraine does not envisage specific anti-avoidance rules. However there is a statutory definition of “reasonable economic purpose” in the Tax Code of Ukraine. If there is no real aim of dealing with a contractor, the taxpayer has no right for compensation of amount of VAT. or for the deduction of its expenses for basis of assessment for CIT. The anti-avoidance rules may also involve thin capitalization rules and transfer pricing rules.
Also to prevent tax avoidance, limitations are imposed on the deductibility of payments to non-profit and government-financed organizations; payments to nonresidents registered in “low-tax” jurisdictions; and royalty payments to nonresidents.
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. As an EU member, Cyprus will also be required to implement the EU anti-tax avoidance directives.
Anti-avoidance rules in Ecuador include transfer-pricing, thin capitalization and interest deductibility restrictions. Although Ecuador does not have CFC rules, the local tax administration combats deferral by applying the concept of economic substance to disregard entities that exist exclusively for tax purposes. Enforcement of GAAR is commonly reviewed in tax audits. The SRI is not empowered to negotiate with taxpayers.
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 thwarted, 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 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 the GAAR Advisory Panel (part of the GAAR operating process) has only issued opinions in connection with an avoidance scheme in an employment context. However HMRC has issued very extensive guidance materials indication how the GAAR would be operated in a wide range of contexts, including corporate tax.
Yes, the Income Tax Act 2010 does contain a general anti-avoidance provision. It is applied primarily in negotiations and discussions, rather than in litigation.
In Switzerland, GAARs are not contained in a specific act. The Federal Supreme Court developed through the years a general principle of abuse of law or tax avoidance, applicable to all Swiss taxes. In accordance with this principle, applied by all Swiss courts and tax authorities, tax authorities have 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 contains specific anti-avoidance provisions.
Regarding the specific issue of treaty shopping, Switzerland signed on June 7, 2017 the OECD’s Multilateral Instrument (‘MLI’), that introduced a ‘principle purpose test’, according to which a benefit under a tax treaty shall not be granted if obtaining that benefit was one of the principal purposes of an arrangement or transaction.
There is a long-standing and well established general anti-avoidance provision in Israel’s tax law that permits a tax-assessing officer to disregard a transaction that is artificial or fictitious, or one the principal objectives of which are an improper avoidance or reduction of tax. Moreover, general anti-avoidance doctrines that are common in other countries such as the “substance over form” and “step-transaction” doctrines have been adopted by Israeli courts. There are also several specific anti-avoidance provisions, as well as regulations that impose various disclosure requirements with respect to certain defined categories of transactions or tax positions.
From our experience, the ITA is not hesitant in invoking its authority under the general anti-avoidance provision, including litigating disputes on this basis, although the ITA is generally responsive to conducting pre-litigation negotiations with taxpayers in an attempt to resolve disputes before they reach the courts.
A GAAR was introduced in 2015 providing that an arrangement or series thereof shall be considered abusive if:
- They lack economic substance;
- Although being compliant with law provisions, they essentially realise undue tax advantages
The application of the GAAR is often raised by the tax authorities and litigated in courts.
The Portuguese GAAR, introduced in 1999, was preceded in the mid-1990s by the introduction of specific anti-avoidance rules (SAAR) with an international focus, such as thin capitalization rules (1995), CFC rules (1995) and a series of rules dealing with low-tax jurisdictions, namely blacklisted jurisdictions.
The Portuguese GAAR entered into effect in 1999 and from the outset it has been considered that it would apply to both domestic and cross-border transactions alike. Therefore there has been no attempt to introduce any additional avoidance provision that would specifically target cross-border transactions.
Section 23 of the Income Tax Act sets out the general anti-avoidance provision. The provision empowers the Commissioner to adjust the tax liability of a taxpayer where he is of the opinion that the main purpose for a which the taxpayer effected a transaction was tax avoidance, reduction of tax liability for the year of income or the main benefit which might have been expected to accrue from the transaction in three years immediately following the transaction is tax avoidance or reduction of tax liability.
The Tax Procedures Act imposes a penalty for tax avoidance equal to double the amount of the tax that would have been avoided but for the application of the tax avoidance provision.
It is not common for the KRA to apply the anti-avoidance provision but in instances where it is applied, this usually culminates in a tax dispute.
The General Anti-Avoidance Rules (GAAR) were implemented in Poland on 15 July 2016. Under the GAAR, the tax authorities are empowered to challenge the tax results of a given transaction in case it is artificial and not appropriate, taking into account the overall circumstances, and was executed mainly for tax reasons. Since the GAAR is a new concept, there has not yet been a finalised case in which these rules could be applied. According to the justification provided once implementing the GAAR, they should be applied somewhat rarely, and mainly in significant cases.
The GAAR regulation stipulates the possibility for obtaining a special ruling securing a given transaction against the application of the GAAR to a given transaction. During the first year of the GAAR being in force, no such ruling has been granted.
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.
The Netherlands has anti-avoidance rules in place with respect to international holding structures where foreign entities hold substantial (5% or more) shareholdings in Dutch entities. In addition a general anti-abuse rule was developed in case law ("fraus legis") for situations that were not covered by specific anti-abuse rules. The MoF holds the view that with the "fraus legis" concept and the more specific anti-abuse rules in place no further legislative action is required. Since the "fraus legis" concept can be widely applied, its applicability is regularly tested in court.
The Mexican tax system contemplates transfer-pricing, thin capitalisation, CFC, back-to-back and tax re-characterisations as general anti-avoidance rules. Moreover, Mexican authorities have established more stringent requirements that ought to be complied with for double taxation agreement to be applicable (ie, the filing of a sworn affidavit executed by the foreign resident’s legal representative stating the existence of double taxation). 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 to comply with the standards set forth by the BEPS action plan. In this sense, for the past few years, tax authorities have adopted more stringent requirements and standards to measure the taxpayers’ compliance with anti-avoidance rules. As consequence of the foregoing, it is common for taxpayers to challenge the application of such rules by Mexican tax authorities.
Norway has a general anti-avoidance rule which is developed by the courts. Under the existing rule, transactions may be reclassified for tax purposes if certain criteria are met.
The rule consists of a basic premise and an overall assessment. The basic premise is that the main motive behind the transaction must have been to reduce Norwegian taxes. Application of the rule also requires that it, based on an overall assessment of the effects of the disposition, the taxpayer's objective in making the disposition and the circumstances in general, seems adverse to the objective of the specific tax rule to use the disposition as a basis for taxation.
The standard is wide-ranging and the tax authorities are applying the anti-avoidance rule in a lot of different cases. Therefore, the enforcement of the rule is quite commonly litigated. The quantity of decisions from the Norwegian Supreme Court concerning the application of the rule is fairly extensive.
The German General Fiscal Code contains a GAAR which shall prevent the abuse of legal structuring options to avoid or minimize taxation. In broad brush an abuse exists where an inappropriate legal structure is selected which, in comparison with an appropriate structure, leads to tax advantages unintended by law for the taxpayer or a third party. On the contrary, no abuse shall exist where the taxpayer provides evidence of non-tax reasons for the selected structure which is relevant when viewed from an overall perspective.
German tax authorities try to challenge legal structures mostly during tax audits, in particular if they consider the structure to be very aggressive. It is possible to settle such disputes with negotiations. However, occasionally the tax authorities try to enforce the GAAR by way of assessment. The local tax courts and the Federal Fiscal Court are more reluctant towards the concept of GAAR and apply it less extensively than the tax authorities do.
Transactions are deemed to be abusive and are therefore disregarded it the consist of a chain of legal transactions, which has an unusual and inappropriate character and can only be explained due to tax reasons. In addition, the Austrian law follows the substance over form approach. These two GAAR rules are often used by the authorities to challenge tax structures, intragroup transactions and reorganisations.
The principle purpose test (PPT), as stipulated in Art 6 of the EU Anti-BEPS Directive is not implemented in Austria. However the Austrian tax administration understands the existing GAAR in a way to exclude structures without any meaningful non-tax reason and thinks to come to the same conclusions as would be the case with a PPT rule. Additionally, the PPT rule will also become relevant for Austrian DTC as far as they are covered by the MLI (see below point 12 and 13).