GAAR: Taking a leaf from global rules

Khyati Dharamsi

In the run-up to the Union Budget 2013-14, which may spell out the final word on General Anti Avoidance Rules (GAAR), let us see how other nations have designed it

Introduction of GAAR Globally:

Country	Period
Australia	1981
Ireland	1989
Canada	1988
China	01-Jan-08
South Africa	03-Feb-07
Germany	01-Jan-08
India	April 1, 2013 *
*proposed

Story Starts Here

The decibels discussing the ill-effects of the draconian General Anti Avoidance Rules (GAAR) are getting louder. We always look upto the west to measure up our progress. However, as the so called developed nations of USA and UK have been treading slow on the GAAR path, it’s time we take a leaf out of the GAAR books of nations that have adopted it in the past. Studying the problems they have faced during the implementation of GAAR should teach us a lesson or two.

Several countries have introduced GAAR into their Income Tax Act or to their Constitution. Australia introduced it as early as 1981, later New Zealand, Canada, South Africa, Germany, France China and others have followed the league.  UK still follows the ‘judges to decide approach’. In countries such as Poland, the ill-effects lead to the nation declaring it unconstitutional and looking to replace the existing GAAR provisions.

Where do the draft GAAR norms dictated by the Indian Finance Ministry stand vis-à-vis the other nations? KR Sekar, Partner at Deloitte Haskins and Sells, explains, “India is following the South African model. Other countries have GAAR norms in their tax codes, but USA has an in-built tax-avoidance rule. After the Shome-committee recommendations have been accepted, India is more or less at par with the international anti-tax avoidance rules.”

A white paper by Rahul Garg, Leader Direct Tax and Kaushik Mukerjee, Leader-Direct Tax Centre of Excellence of PricewaterhouseCoopers titled “Removing the fences -Looking through GAAR”, notes, “Experience shows that countries in which a GAAR has been introduced in legislation have taken considerable time in its stabilization.”

PwC also states in the report, “The current GAAR provisions appear to have been conceived primarily from the Revenue angle. The better approach would be to involve all the stake holders in conceiving and formulating such provisions having far-reaching implications. This will address the genuine concerns of all stakeholders. Internationally, such a practice is followed in major countries. 

While the Indian draft GAAR provisions leave tax payers in the lurch of uncertainty on whether the transaction would be considered as better tax planning or avoidance, countries such as Canada have sought to strike a balance between “the protection of the tax base and the need for certainty for taxpayers in planning their affairs.”

Let’s see where else do we differ from the GAAR adopted globally.

Tax saving as the main motive

Tax avoidance arrangement is defined as arrangements that have been entered into with the “main purpose” of tax benefit. Various countries have interpreted “main purpose” in different ways. In South African case laws ‘main’ has been considered as - a purely quantitative measure of more than 50% as conveying the idea of dominant or more than anything else, for the most.

Some nations have opted not to define “main purpose”. Just like the term main purpose is not defined in the proposed Indian GAAR, China too has not defined “main purpose”, stating merely that the provisions would be applicable, “where the main purpose is the reduction, exemption or deferral of tax payments.” 

Ambiguity exists in other countries as well where other important terms are left undefined. German Tax Code in its new form defined “abuse” as that which occurs only if the taxpayer chooses an ‘inappropriate legal option’. However, ‘inappropriate’ has not been clarified in the code. The German Federal Tax Courts have concluded that inappropriate legal structures are those in which two unrelated and reasonable parties would not have chosen to achieve a specific business goal.

Non residents

In India, the investments made by non-resident Indians in FIIs have been spared from the GAAR purview. But China makes it obligatory for Non-China Tax Residents to report share transfers in offshore special purpose vehicles in some specified jurisdictions which in turn hold Chinese companies’ equity. Based on the information supplied by non-residents, China decides how the GAAR provisions would be applicable.

GAAR – A hanging sword

GAAR is being considered draconian in many nations because of its wide applicability and ambiguity in terms of what would be considered business acumen, tax planning and what would be attacked as an avoidance arrangement.

“In developed nations GAAR is used as a method of last resort and not used rampantly. In India the definitions presently offered are very wide and can apply to any and every transaction. There is a wide base of tax payers who would be impacted as the power has been given to the assessing officer and the commissioner,” says Sandeep Ladda, executive director, PricewaterhouseCoopers India.

The Canadian Courts too have pointed that GAAR was enacted as a provision of last resort in order to address abusive transactions and was not intended to introduce uncertainty in tax planning.

A report submitted by Queens Counsel, Graham Aaronson, to the UK Government on the feasibility of introduction of GAAR said that a broad spectrum GAAR would make the UK less attractive to multinationals due to uncertainty. The report suggests that a broad spectrum GAAR would not be beneficial for the UK tax system as it would carry “a real risk of undermining the ability of business to carry out sensible and responsible tax planning”.  However, the report says that introducing a moderate rule which does not apply to reasonable tax planning, and instead targets abusive arrangements, would be beneficial.

Who establishes the applicability of GAAR?

Will the taxpayer prove his innocence or the revenue authorities prove it? This is where GAAR differs in several nations. Some require the revenue or tax authorities to prove that tax avoidance was the main reason to enter into the arrangement, while in others the company or the taxpayer has to prove that the arrangement was for commercial purpose and not tax benefit alone.

In South Africa, the onus is on revenue authorities to establish the presence of at least one tainted element in order to apply the GAAR. In Canada, the onus is on the taxpayer to refute the presence of tax avoidance as the sole purpose, while the minister has to establish otherwise. However, if there is ambiguity on whether the purpose was tax avoidance or purely commercial, then the benefit of doubt goes to the taxpayer.

In China, the onus is on the companies to prove that the arrangement entered into has reasonable commercial interest within 60 days of receiving a notice from the tax authorities. If the enterprise fails to provide the information within 60 days or can’t prove reasonableness then tax authorities may make tax adjustments based on the information already obtained, and issue a “Special Tax Investigation Adjustment Notice” to the company.

The German Tax Authorities have to prove the inappropriateness of a legal structure and the gain of an unintended tax benefit. This can be contested by the taxpayer.

“To make the provisions fair to genuine taxpayers and to prevent inappropriate use, specific provision should be made so that the initial burden of proof of the allegation that the sole purpose of the arrangement is to obtain a tax benefit should be on the Authority and the taxpayer’s responsibility would be to prove that the main purpose of the arrangement is commercial,” suggests PwC in its report.

Allied evidence and Circumstances

In many countries it is a practice to look at not just the arrangement, but also the supporting circumstances before applying GAAR. Take for instance the Canadian norms, which take into account the circumstances under which the transaction has taken place apart from the taxpayer’s statement of intention. “If it can be inferred from all the circumstances that the primary or principal purpose in undertaking the transaction is other than to obtain a tax benefit, then the transaction is not an avoidance transaction,” states a Canada Revenue Agency Information Circular.

The tax authorities in Australia also look at timing of the scheme as to whether a treaty is entered into just before the end of a financial year or during a time period purely to obtain tax benefits.

What after invoking the GAAR?

After finding the red dot, do the tax authorities merely cancel the tax benefits or are there further actions notified? In Australia, on invocation of GAAR provisions, the tax authorities merely cancel the tax benefit. However, in China, the tax authorities re-characterise the tax-avoidance arrangement apart from cancelling off the tax benefits obtained from the arrangement.

Who vets the decision?

Just like in India, Canada too has a committee to determine whether the GAAR provisions would be applicable to a particular transaction. The members on the committee include officials from divisions of the Canada Revenue Agency, with participation as well from the Department of Finance and the Department of Justice. In India the decision of the Panel would be binding on the tax authorities and the tax payers. However, there is no legal requirement that Canada Revenue Agency auditors adopt the committee’s advice. “Inspite of this, the auditors have been found to almost always adopt the advice of the Committee,” states the PwC report.

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