Strategizing International Tax Best Practices – by Keith Brockman

http://www.legislation.gov.uk/ukpga/2013/29/pdfs/ukpga_20130029_en.pdf

http://www.hmrc.gov.uk/avoidance/gaar.htm

The links provide reference to the UK Finance Act 2013 and information about the development and intent of the new general anti-avoidance rule (GAAR).

The GAAR legislation, effective at date of enactment, includes various taxes with its stated purpose as counteracting tax advantages arising from tax arrangements that are abusive.  A “tax arrangement” must also be “abusive” for GAAR to apply. Part 5, in part, is provided herein for reference.

207 Meaning of “tax arrangements” and “abusive”

(1) Arrangements are “tax arrangements” if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements.

(2) Tax arrangements are “abusive” if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances including

(a) whether the substantive results of the arrangements are consistent with any principles on which those provisions are based (whether express or implied) and the policy objectives of those provisions,

 (b) whether the means of achieving those results involves one or more  contrived or abnormal steps, and

(c) whether the arrangements are intended to exploit any shortcomings in those provisions.

The UK GAAR legislation, as in other countries, is principle based and subjective.  Accordingly,  a comprehensive understanding of the GAAR legislation, and inherent intent, is required.  An interesting aspect of the UK GAAR legislation is the formal procedure to be used by HMRC for application of GAAR.

Best Practices include preparation of a memorandum for planning transactions that objectively states the business / economic reasons to provide rationale for the proposal, thereby deriving business intent for application of the GAAR rules.  Additionally, benefits of early discussions with tax authorities in countries for which co-operative compliance programs are in place (refer to 13 June 2013 post: OECD – A Framework for Co-operative Compliance) should be considered.  

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