Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?
Tax (3rd edition)
In Switzerland, GAARs are not contained in a specific act. Through the years, the Swiss Federal Supreme Court has developed 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, in certain situations, tax authorities have the right to tax a taxpayer’s structure based on its economic substance, rather than the legal structure.
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.
With regard to treaty shopping, on 7 June 2017, Switzerland signed the OECD’s Multilateral Instrument (‘MLI’), which introduced a ‘principle purpose test’. Accord to this test, a benefit provided 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 no GAAR recognized in US tax law. The right of a taxpayer to structure its affairs so as to pay the least amount of taxes legally permitted has been explicitly recognized by US courts. See Helvering v. Gregory, 69 F.2d. 809 (2d. Cir. 1934).
US courts have long applied judicial doctrines such as substance-over-form and the step transaction doctrine to re-characterize transactions in accordance with the underlying substance or disregard meaningless or transitory steps. These rules are commonly applied both by the IRS on examination and by taxpayers and their advisers in analyzing the expected tax treatment of transactions. Step-transaction and substance-over-form doctrines generally apply without regard to the taxpayer’s intent.
US courts have also applied an “economic substance” or “business purpose” doctrine to disregard transactions that have no appreciable effect on the taxpayer other than reduction of federal income taxes. Code Section 7701(o) codifies the economic substance doctrine, and further provides for a strict liability penalty of 40% for transactions lacking economic substance that are not adequately disclosed by the taxpayer on its tax return. The economic substance transaction has primarily been applied to “tax shelters” and other similarly marketed transactions. In the area of normal corporate tax planning, the IRS has been restrained in its application of the economic substance and business purpose doctrines.
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.
Transactions are deemed to be abusive and are therefore disregarded if they 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 implemented in Austria as of 2019. Accordingly, a transaction is regarded as abusive if one of its principal purposes (no longer: the only purpose, as descirbed before) is the saving of taxes. According to the explanatory notes of the tax bill introducing the PPT the PPT is intended to be interpreted along the lines of the ECJ‘s case-law on the abuse of tax law, which the Austrian Supreme Administrative Court used to do also in the past with the old GAAR rule described above. The Austrian tax administration understood the pre-existing GAAR in a way to exclude structures without any meaningful non-tax reason and thinks to come to the same conclusions with the new PPT rule. It might remain to be seen whether this will be shared in the practise and the courts in case of a legal remedy against a decision of a tax office. 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).
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.
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.
The Brazilian anti-avoidance rule was introduced by in 2001 by article 116 of Supplementary Law 104, which established that tax authorities can disregard legal acts or transactions practiced with the objective of disguising the occurrence of a taxable event, or the nature of the elements that constitute the tax obligation, observed the procedures to be established by ordinary law.
Notwithstanding, the Anti-avoidance Rule still needs to be regulated by an ordinary law to become effective.
It is important to note that, although subject to discussion, Brazilian tax authorities tend to consider the “substance” of the transaction over the “form” in order to disregard transactions based on the concept of simulation established by article 167 of the Brazilian Civil Code.
According to such provision, simulation occurs whenever: (i) the performed business appears to provide or transfer rights to persons other than those to whom the rights are actually conferred or transferred; (ii) the performed business contains an untruthful declaration, confession, condition or clause, or (iii) the private agreement are backdated or post-dated or post-dated.
In practice, Brazilian tax authorities have been adopting such approach on corporate reorganizations.
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.
Ireland has had a GAAR in domestic tax legislation since 1988. Broadly it can apply where a transaction gives rise to a tax advantage and was not undertaken or arranged primarily for purposes other than to give rise to a tax advantage. This is a matter that is threatened and litigated by the Irish Revenue.
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.
Yes, Section 140(1) of the ITA provides vast powers for the DGIR to disregard or vary transactions where there is reason to believe that any transaction has the direct or indirect effect of altering the incidence of tax, relieving any person from any tax liability, evading or avoiding any duty or liability, or hindering or preventing the operation of the ITA. Section 140 is commonly relied upon by the IRB during audits and frequently used as a basis for raising assessments and enforcement of the same is commonly litigated.
Section 140A further provides specifically on transfer pricing that where the DGIR has reason to believe that property or services are acquired or supplied at a price which is either less than or greater than the price which it might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm's length, he may substitute the price in respect of the transaction to reflect an arm's length price for the transaction. Notwithstanding that there has been an increase in the volume of assessments raised by the IRB for audits conducted, there appears to be a trend for disputes whereby the IRB relied on Section 140A to be resolved amicably out of court.
The Mexican Income Tax Law does provide with a series of general anti-avoidance rules which include CFC, back to back, thin capitalization, beneficial ownership tests and dividend re-characterization rules. In addition, for cross-border related-party transactions, tax authorities may use a “substance over form” approach to determine whether tax simulation practices exist to avoid taxes. In these cases, authorities are empowered to give the simulated transaction the tax treatment that corresponds to the actual transaction, and may thus require the payment of any triggered taxes based on such circumstances.
Tax authorities have access to detailed information about transactions entered into by Mexican taxpayers with foreign related and un-related parties, as a consequence of the different information reports and returns that taxpayers are required to file.
Since Mexico is a capital-importing country, compliance with general anti-avoidance rules is considered a priority for the tax authorities. As a result, the Tax Administration Service operates advanced systems to process the information filed by taxpayers and shared by other countries through specialized units that analyze information regarding international structures and cross-border transactions focusing exclusively in identifying and countering avoidance practices adopted by taxpayers.
Consequently, tax assessments derived from a breach to general anti-avoidance rule are usually well supported, thus narrowing the possibilities of a successful negotiation with the tax authorities themselves and forcing taxpayers into negotiations through the Prodecon. If these mediation procedures are in turn unsuccessful, taxpayers will usually litigate the assessments derived from the application of GAAR before the tax courts.
Norway has several substance over form rules. In general, these rules apply to any transaction or structure whose primary motive is to achieve tax benefits and is deemed disloyal to the tax legislation.
One anti-avoidance rule applies in connection with changes of ownership through sale of shares, mergers, demergers and other transactions. If the predominant motive of such a transaction is to exploit a tax loss carry forward or other tax positions, the tax position will be considered void.
In addition, a general anti-avoidance doctrine has been developed by the courts. Transactions with little or no other purpose than avoiding tax may under certain circumstances be disregarded for tax purposes, provided that the transaction can be considered disloyal to the purpose of the tax legislation.
The Norwegian anti-avoidance doctrine is often described as one of the most expansive, and the tax authorities have often argued for the application of the anti-avoidance doctrine in tax re-assessment cases. Consequently, the enforcement of the doctrine has been litigated on numerous occasions, and several times before the Supreme Court.
There are no general anti-avoidance rule (GAAR) regulations in our tax code.
The Philippines does not have a general anti-avoidance rule. However, issues concerning tax avoidance usually end up litigated for judicial determination as tax authorities interpret tax laws in favor of the government.
There is a GAAR in the Portuguese law which was implemented in 1999 in the General Tax Law.
In the last years the Tax Authorities made a relevant effort to enforce more often the GAAR (e.g. in situations in which the taxpayer opts for realizing a capital gain instead of receiving a dividend, maintaining indirectly the shareholding). The GAAR enforcement has been litigated, and the tax authorities have had a low rate of success.
But the real GAAR is the informal one: the general provision that governs the deductibility of costs, which the tax authorities prefer to apply in order to try to circumvent the demanding requirements of the GAAR. There is also arbitral and judicial litigation on several specific anti-abuse rules, namely regarding the deduction of costs incurred within the activity of the company and the autonomous taxation on certain expenses deemed to be incurred outside the scope of the company’s activity.
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.
In Turkey, the substance over form principle, as described in Article 3/B of Tax Procedure Law, serves as a GAAR. According to this principle, taxation should rely on “true nature” of taxable events. This principle allows the tax authority to characterize the transactions differently than the parties and to assess taxes independent of legal form and denomination of transactions. On the other hand, this rule is also used by taxpayers where additional taxes are assessed by the tax authority with a strict literal interpretation of laws or documents but economic substance of the transaction requires to pay less tax. In any case, the principle is often referred in Council of State precedent.
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, by a recent landmark High Court decision, to mean that the act or accounting of the subject taxpayer is so unnatural or unreasonable as an act or accounting of a genuinely economically reasonable person from an economic and substantive viewpoint. A leading tax law scholar amplifies the foregoing requirement as meaning that 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 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 landmark 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. To the author’s knowledge, there has been no published 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 Dutch tax authorities (DTA) may try to challenge a restructuring on the basis of the general Dutch anti-abuse doctrine (Fraus Legis). Fraus Legis does not form part of written legislation, but is formed and dictated by Dutch case law. Fraus Legis applies when:
i. tax avoidance is the main motive of the taxpayer to enter into a transaction or series of transactions (Motive Test); and
ii. the tax consequences of the transaction(s) lead to a result that is contrary to the objective and purpose of Dutch tax law (Purpose Test).
With the application of Fraus Legis, by either eliminating or substituting a legal action to align the arrangement with the objective and purpose of the tax law, a substance over form approach is taken putting the situation created on par with the legal situation that would result in taxes being due as intended by the legislator. So far, the abuse of law doctrine has not been applied extensively by the DTA, respectively the Dutch courts.
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, the GAAR rules provided by ATAD were implemented in the Romanian tax legislation as of 1 January 2018, stating that. for the purpose of calculating the tax liabilities, it shall be ignored an arrangement or series of arrangements which, taking into consideration all relevant facts and circumstances, are not genuine, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage and not for valid commercial reasons which reflect economic reality. In this framework, special attention must be paid to any aspects which may trigger suspicions of criminal offenses being committed by the taxpayer.
Yes, our Tax Act does contain anti avoidance provisions which are applied by the tax authority whereby the Commissioner may disregard part or all of any arrangements that are deemed to be artificial/or fictitious and whose purpose is to reduce or eliminate tax payable in Gibraltar.. Companies will be expected to have regard to GAAR and other relevant international standards.
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.