Strategizing Multinational Tax Risks

Click to access GAAR_rising_1%20Feb_2013.pdf

The EY report is invaluable in explaining the origins of a general anti-avoidance rule (GAAR), recent developments and future trends.  It provides a comprehensive background on GAAR, including results from a survey of 24 countries.  The February 2013 report looks at various countries developing GAAR, European Commission recommendations, how and when GAAR measures may be invoked, and what companies can do to mitigate risk in their tax risk management.  One of the many highlights in the report is the comparison of tax treaties and domestic application of GAAR.

Examples of EY insights include the following:

• GAAR is defined as a set of broad principles-based rules within a country’s tax code designed to counteract the perceived avoidance of tax.
• Tax law designed to deal with particular transactions of concern are termed as either specific anti-avoidance rules (SAARs) or targeted anti-avoidance rules (TAARs).
• China had started 248 GAAR cases in 2011, concluding 207 cases with taxes collected of $3.8 billion.
• Each country will have its own definition of an “abusive” or “avoidance” transaction that could be the target of its GAAR.
• A tax benefit, transaction or arrangement within GAAR regimes are not unified, thus requiring a close review of each country’s definitions.
• GAAR independent review panels are developing to oversee its application
• Virtually all countries have multiple SAAR and/or TAAR provisions, although only a few have been abolished with introduction of a GAAR.
• Inconsistency of GAAR application to arrangements that have already been subject to one or more SAAR measures in that jurisdiction, including India, China and Chile.
• China SAT seems to be expanding its beneficial ownership test into an anti-treaty shopping/anti-abuse test, creating more uncertainty.
• The use of GAAR also extends to benefits provided by tax treaties.  Tax treaties include bilateral anti-avoidance provisions, although several countries are applying unilateral anti-avoidance measures via interpretations of existing treaties or applying domestic law GAAR provisions to treaty benefits.
• Countries are including in their tax treaties explicit authorization of the application of domestic law anti-avoidance provisions.
• Approx. 12 of 24 countries surveyed allow their GAAR provisions to override existing tax treaties, unilaterally or applying domestic GAAR.
• 30% of participants from a 2012 GAAR webcast responded that they do not address GAAR within their tax risk management approach.
• Best Practice: Use a tax governance framework with documented processes for significant transaction sign-off.
• Best Practice: New GAAR, SAAR and TAAR proposals should be monitored and factored into the tax life cycle of a multinational business
• Best Practice: Transaction documents should state the intended purpose of the overall transaction, as well as each step therein.
• Best Practice: Document alternative positions considered, demonstrating that the final position was the only reasonable position to obtain the commercial objectives, and that there were no transactional steps taken that were explicable only in a tax benefit context.
• Best Practice: Obtain external advice on significant transactions, including opinions on GAAR.

Several tables include insightful observations, including:

1. Table 1, GAAR introduction timeline in various countries
2. Table 2, Burden of proof for each country; taxpayer, tax authority, or shared
3. Table 3, Examples of 2011-12 tax treaties with reference to application of domestic anti-avoidance rules in the treaty context.
4. Table 4, Countries providing GAAR rulings/clearances

Additionally, eight questions are posed for a Board to ask in relation to GAAR:

1. Does the transaction have a valid commercial purpose?
2. Is the transaction unique and complex?
3. Is the tax benefit material to the financial statement?
4. Could the transaction  be undertaken in a different manner, without attracting the potential application of GAAR?
5. Has an opinion been obtained that the transaction will more likely than not withstand a GAAR challenge?
6. Is the transaction defendable in the public eye?
7. What is the corporation’s tax risk profile both globally and locally?
8. How comfortable is the corporation with litigation if it is required to defend the transaction?

The Appendix of the report provides answers, for each of the 24 countries, to the following queries:

• Does a GAAR exist?  If so, year of introduction and effective date
• Can the GAAR be applied retrospectively?
• Do specific anti-abuse measures exist?
• Does your country have specific legislation in place related to the indirect transfer of assets?
• What are the circumstances in which the GAAR can be invoked?
• Is the burden of proof on the taxpayer or taxing authority?
• Does your country have a GAAR panel?
• What is the attitude of the tax authority toward invoking a GAAR?
• Is a clearance/rulings mechanism available?
• Can the GAAR override treaties when invoked?
• What penalties may result from the GAAR being invoked?
• Provide a summary of key judicial decisions involving GAAR or other anti-abuse legislation.
• Are there any legislative proposals or open consultations that may affect the future composition of a GAAR?

Prior posts for additional reference:

• 6 August; U.N. Committee of Experts to address the Manual for Negotiation of Bilateral Tax Treaties in October 2013
• 21 July; UK Finance Act 2013: GAAR has arrived
• 19 July; OECD BEPS Report & Action Plan
• 4 July; Italy: New Co-operative Compliance Program
• 29 June; Board Oversight and Responsibilities for Tax Risk Management
• 13 June; OECD: A Framework for Co-operative Compliance
• 5 June; GAAR: India & International Perspective

This report is a comprehensive review of GAAR and should form a foundation for planning significant transactions and adopting Best Practices within the global Tax Risk Framework.  For example, the eight questions to be posed by the Board could form Best Practices for planning significant transactions.  The report is a valuable tool for regional and global tax teams as the trend of GAAR, and understanding its subjective principles, is becoming more complex in today’s ever-changing tax environment.