06 LEADING THE NEWS

TUESDAY, MAY 8, 2012, DELHI WWW.LIVEMINT.COM

mint

When does GAAR apply?

AUSTRALIA

Australian GAAR, put into place in 1981, targets contrived and articial tax avoidance schemes. It denes an impermissible avoidance arrangement as a scheme that has been entered into for the sole or dominant purpose of obtaining a tax benet.

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CANADA AUSTRALIA CANADA

for bona de purposes other than to obtain the tax benet, must have occurred. Secondly, the transaction would have resulted directly or indirectly in an abuse or a misuse of the tax laws, including regulations and treaties.

SINGAPORE
GAAR kicks in when the purpose of any arrangement is to alter the incidence of any tax which is payable, or to reduce or avoid any liability imposed. Introduced in 1988, it excludes all transactions entered into before that date.

THE US
The US does not have a GAAR codied in the domestic tax laws. But the US tax code contains a set of broad mini-GAAR statutory rules as well as targeted anti-avoidance legislative xes. For tackling avoidance transactions, common law doctrines are laid down by courts, which include assignment of income; sham transaction (a taxpayer cannot call a transaction X when the taxpayer actually performed transaction Y); economic substance (this requires a court to consider whether the transaction meaningfully changed the economic position of the taxpayer in a non-tax way); business purpose (this means that a transaction will be disallowed even if a taxpayer complies with the requirements under the relevant statute, but if the same lacks bona de business purpose); substance over form (it disregards the legal form used for a transaction

by a taxpayer by hiding the business or economic reality of a transaction).

THE NETHERLANDS
GAAR is not codified in the statute but is based on judicial precedents. Since it is based on case law, it reduces conflict with judiciary. It can be invoked by the tax authorities in cases where the taxpayer entered into a transaction that was contrary to the purpose of Dutch tax legislation and with the predominant aim of avoiding taxation.

SOUTH AFRICA
Introduced in 2006, it enables tax authorities to apply GAAR provisions to any step or part of an arrangement, which in itself then constitutes the avoidance arrangement.

THE UK
The UK does not have a GAAR codied in domestic tax laws and instead relies on specic provisions more on targeted anti-avoidance legislation. The government, however, announced in its recent budget that it is holding consultations on the introduction of a GAAR, with a view to potentially legislating the rules in 2013. A committee of tax professionals and judges has recommended the inclusion of GAAR in UK tax legislation that does not apply to responsible tax planning and is instead targeted at abusive arrangements.

CHINA
GAAR was introduced in China in 2008. It applies if a tax avoidance arrangement misuses tax preferential treatment; misapplies a tax treaty; misuses form of corporate organization; avoids tax by using tax havens; enters into any arrangement for non-reasonable commercial purpose.

The Canadian GAAR, in place since 1988, applies if two broad elements are satised. First, an avoidance transaction, dened as any transaction that results in a tax benet unless undertaken

On whom does the burden of proof lie?

Onus and burden of proof lies with taxpayer.

Canada provides for a split burden, where the taxpayer needs to refute there is a tax benet arising from a transaction and that the transaction is an avoidance transaction. The tax authority, on the other hand, needs to prove there was abusive tax avoidance in the sense that it cannot be reasonably concluded that a tax benet would be consistent with the object, spirit or purpose of the provisions relied upon by the taxpayer.

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GAAR in other countries

What are the discretionary powers with the government?

AUSTRALIA

India on Monday deferred the implementation of the contentious general anti-avoidance rules (GAAR) to check tax evasion. On Monday, nance minister Pranab Mukherjee proposed diluting some of the provisions of Indian GAAR, which has evoked widespread opposition from foreign institutional investors. The global experience of this tax provision has been mixed. As the debate continues over GAAR, Ernst and Young has compiled the experience of different countries for Mint.

GAAR is reviewed by an independent panel comprising of senior tax officers and business and professional people chosen for their ability to provide expert advice.

THE UK
An ofcial committee that has recommended the inclusion of GAAR in UK tax legislation has suggested placing the burden on the tax authority of proving that an arrangement is not reasonable tax planning.

CANADA
Potential GAAR assessments are referred to a non-statutory GAAR committee comprising of representatives from departments of finance and justice.

CHINA
GAAR investigations and adjustments have to be reported to the state administration of taxation for approval. No advance ruling mechanism or a review of GAAR application by an independent body.

Do GAAR provisions override double tax avoidance treaties?

AUSTRALIA
Whether GAAR can override the tax avoidance treaty has been a contentious issue.

THE UK
The official committee has recommended an advisory panel, with relevant expertise and a majority of nontax authority members, to advise whether invoking GAAR was justified. Potential application of the GAAR has to be authorized by senior officials within the tax authority to ensure consistency and responsibility in its application.

CHINA

The revenue authorities can launch GAAR investigations on a taxpayer if the transaction is done using tax havens to avoid taxes.

THE US
Since GAAR is not codified in the legislation, US courts lay down law doctrines.

THE NETHERLANDS:
GAAR would not impact tax treaties unless the tax treaty has provisions enabling GAAR application.

Has implementation of GAAR increased litigation?

GRAPHIC BY UTTAM SHARMA; PHOTO BY RAMESH PATHANIA/MINT

AUSTRALIA
Scope of GAAR provisions in Australia is quite wide and prone to frequent disputes. Framework for advance ruling in relation to application of GAAR is available.

supreme court. A framework for advance ruling in relation to application of GAAR is available.

CHINA
Laws do not appear to be allembracing. Denes specic tax avoidance triggers (e.g. misuses tax preferential treatment, misapplies tax treaty, misuses corporate organization, avoids tax by using tax havens, etc,).

based on case law, it reduces conict with judiciary.

SOUTH AFRICA
South African GAAR appears all-embracing to deter all tax avoidance. Danger of penalizing those who have genuine reasons for entering into a bona fide transaction exists.

THE US
The Senate finance committee is pushing for codification proposals in federal tax Bills. However, the House of Representatives has not accepted these codification proposals.

CANADA
There is high degree of litigation on applicability of GAAR with many cases going to the

THE NETHERLANDS
GAAR is not codied in the statute but is based on judicial precedents. Since its

Compiled by Ernst and Young