In the midst of the United Kingdom’s heated debate on tax morality and transparency, a new general anti-abuse rule (GAAR) was enacted on 17 July 2013. Such rules have become increasingly common in other countries. While they are broadly similar, there are significant differences in how they are applied in practice. Based on the overseas experience, what can taxpayers expect as the UK GAAR takes hold? Chris Morgan offers up his views.
Regular anti-avoidance rules aim to prevent specific arrangements and transactions that reduce taxes in ways that governments find inappropriate. Unlike such targeted anti-avoidance rules (TAAR), GAARs apply more broadly. They give tax authorities a tool to combat arrangements that may be within the letter of the law but run against the law’s object and spirit.
Specifically, the UK’s GAAR is designed to stop abusive tax arrangements from achieving a tax advantage that is contrary to the intention of parliament. Basically the test is whether a person could reasonably consider the planning or acts in question as a reasonable course of conduct given the relevant law.
Arrangements are considered “tax arrangements” if it seems reasonable to conclude that obtaining a tax benefit is one of the arrangement’s main purpose. And, “Tax advantages” under the UK GAAR extend beyond tax reductions to include timing advantages (e.g. deferral) and the avoidance of withholding tax obligations- in other words, any type of tax benefit.
The GAAR is intended to be used to thwart planning that cannot be defeated in court by using a purposive interpretation of the law. It can also be used as a cheaper, quicker way to prevent or deter planning that could in fact fail to withstand a lengthy court challenge.
The stated objective is that it is aimed at the aggressive range of planning. It is important to remember that the UK GAAR does not target tax planning that involves a reasonable choice between different courses of action that are taxed in different ways. For example, the GAAR would not apply to the types of international structures which have made headlines in the UK recently, for example, where a foreign multinational arranges its affairs so it can sell into the UK without having a taxable presence in the UK under current law. In such a case, the result is consistent with the policy when the UK and international rules were introduced – that is, to only tax non-resident companies that trade in the UK through a physical presence. The fact that the quantity of such trade created by the Internet was never foreseen does not bring the GAAR into play.
Special procedures are being put in place for the GAAR’s application, similar to those used in countries like Canada and Australia. In the UK, where a tax inspector encounters a situation to which they think GAAR applies, they must refer the matter to a designated officer who will decide whether or not to issue a written notice to the taxpayer. The use of a designated officer is intended to ensure equal treatment throughout HMRC and to stop inspectors automatically threatening use of the GAAR in any dispute. Taxpayers can make their own written representations. However, if a designated officer still believes the GAAR may apply, then the case will be referred to an independent advisory panel comprised of three members.
The panel will consider and issue its opinion on the applicability of GAAR. The opinion is not binding on HMRC. However, if even one member of the panel thinks the planning is reasonable, it would be difficult for HMRC to proceed. If the panel decides that the GAAR applies, the taxpayer can still pursue the matter in the courts, which will be obliged to take the panel’s opinion into account on deciding the matter.
If the GAAR is ultimately found to apply, the tax advantages of the arrangement will be counteracted on a just and reasonable basis. No penalties will be levied, although the taxpayer could bear interest on unpaid taxes and they could still be subject to the normal penalty regime for inaccurate returns
One of the biggest issues for companies is in getting certainty over the GAAR’s potential applicability. The HRMC’s interim panel on GAAR has issued draft guidance on situations where the GAAR would and would not apply. However, it is not always easy to discern clear principles from the examples included in the guidance.
Based on experience in other countries, we expect that it will take time and practical experience before the UK GAAR settles in and HMRC can offer taxpayers a reliable body of guidance.
Although many jurisdictions have clearance processes, the process is only consistently used in China. In all other countries, the process is seen as biased towards the tax authorities. Taxpayers are often reluctant to pursue clearance because they are wary of simply inviting a negative answer. The UK GAAR does not have an advance clearance mechanism.
For a number of reasons, most tax authorities only use GAARs as a last resort:
- There is accountability for invoking a GAAR, as in Canada and Australia, as the tax authority must seek an oversight panel’s approval.
- The GAAR’s successful application will not result in penalties, as in Spain.
- It is easier for the tax authority to apply other rules, such as TAARs and disclosure rules for specific types of transactions, as in Ireland.
As a result, tax authorities around the world tend to only apply GAAR in the most exceptional circumstances.
Given the GAAR’s purpose of addressing situations of outright abuse of the tax laws, the vast majority of corporate taxpayers have little reason for concern. In fact, the effort involved in applying GAAR combined with the many TAARs at HRMC’s disposal makes it unlikely the that GAAR will create a significant shift in HRMC’s assessing practice in the foreseeable future.
In fact, many of my UK-based clients support the new rule as it could serve to level the playing field for companies that are planning their tax affairs within the tax law’s intended purpose.
Looking overseas, it is clear that GAARs can be structured in many different ways. These range from the simple ones seen in mainland Europe (where they are really a simple abuse of law principle such that transactions are caught if they are entered into solely to claim a tax benefit) to the very complex rules found in, for example, South Africa (where the details run to many pages and there are numerous factual conditions to consider).
Based on our research, it is not possible to assume that, even if legislation is very similar, the application and practical consequences of GAARs will be the same. There are several areas where similar legislation has resulted in very different outcomes.
As a result, companies that operate or plan to operate in one or more countries that have a GAAR should investigate how these various laws are applied in practice. Companies would also be wise to document their motives and technical analysis of their transactions at the time the transactions are completed.
As a Tax Partner with KPMG in the United Kingdom and the current Head of Tax Policy & Head of EU Tax Group, Chris has over 20 years experience in advising on international tax matters. This includes advising on CFC and repatriation planning, cross-border financing, reorganizations, mergers and acquisitions, business structuring, commissionaire and contract manufacturing structures, exploitation of intellectual property and EU law.
In his role as Head of Tax Policy, he is a regular commentator in the press, as well as on radio and TV, has led discussions on various representations with HMRC/HMT and also formulated and advised on the introduction of a business tax law for a foreign government. Chris is a member of the CBI International Tax sub-committee.
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