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Beware of the GAAR: UK Must Learn Lessons from Across the Globe

Beware of the GAAR: UK Must Learn Lessons from Across the Globe
29 Jan 2013
New rules are a 'fly in the ointment' for UK's competitive standing

"The UK government's pursuit of a General Anti-Avoidance Rule (GAAR) to address abusive and artificial tax avoidance has a stable rationale, though runs the risk of adding unnecessary complexity to existing legislation as well as destroying potential future multinational investment into the country.

"In some ways, the UK is in a different position to many other countries that have previously introduced a GAAR, given the well established and sophisticated body of anti-avoidance case law which is already in place as well as a proliferation of targeted anti-avoidance rules. However, whilst the GAAR may well be seen by Government as a way of reducing the number of targeted anti-avoidance rules in the long run, there is a concern that the legislation will simply sit on top of the existing rules, creating additional complexity and uncertainty for companies when it is introduced.

"This type of uncertainty was prevalent in Canada when the rules were initially introduced in 1988 and caused widespread uncertainty for foreign investors. Moreover in Germany and South Africa, who were both relatively early adopters of a GAAR, implementation - meant to simplify anti-avoidance legislation - has actually predicated an increase in the number of specific anti-avoidance rules. This adds layers of complexity for taxpayers and has proved ineffectual in streamlining the system.

"India, a country also exploring the implementation of a GAAR, first announced its intentions towards the legislation in March, but has since taken its foot off the pedal. The proposals have already been blamed for driving inward investment away from the country and the plans are now more than likely to be kicked into the long grass until 2016, following the recent recommendations of an advisory panel set up by the Indian Prime Minister.

"Furthermore, the GAAR reforms in India are now likely to offer safe harbours to foreign investment institutions which will act as a significant relief to many multinationals exploring expansion in the region.

"Reinforcing concerns over a UK implementation of a GAAR is the experience of Australia, whose anti-avoidance regime is probably the most comparable with the UK Government's proposals and has been seen by many as having a significantly an adverse impact on the competitiveness of Australia.

Kevin Hindley, Managing Director, Taxand UK

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Taxand's Take

"In many ways the GAAR is a fly in the ointment for the UK's standing as a competitive jurisdiction for attracting business and stands in surprising contrast to recent measures, such as the gradual reduction of the corporate income tax rate. The Government must learn lessons from the impact of similar legislation in other countries in order to avoid a potentially dangerous signal to global business."

Taxand's Take Author